S&P global speculative-grade default rate increases to 2.59% in August

By Caroline Salls

Pittsburgh, Oct. 16 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate climbed to 2.59% in August from 2.56% in July, according to a report titled "Global Weakest Links And Default Rates: Weakest Links Count Increases By Nine."

Regionally, the U.S. corporate speculative-grade default rate slipped to 2.82% in August from 2.83% in July, while the European speculative-grade default rate rose to 2.7% from 2.42%. The emerging markets speculative-grade default rate decreased to 1.66% in August from 1.97% in July.

S&P said 61 issuers have defaulted through Sept. 24, including confidential entries. These defaulted issuers have outstanding debt worth $60.7 billion.

In comparison, S&P said 53 defaulted issuers had combined outstanding debt worth $87.7 billion in 2011.

The agency said three non-confidential entities have defaulted since its most recent report, including Marsico Holdings LLC, Banco Cruzeiro do Sul SA and GMX Resources Inc.

Weakest links increase

According to the report, the number of global weakest links increased to 137 at Sept. 24 from 128 at Aug. 22. The 137 weakest links have total rated debt worth $240.5 billion.

Weakest links are issuers rated B- and lower with either negative outlooks or ratings on CreditWatch with negative implications.

Since its most recent report, S&P said it removed four entities from the weakest links list and added 13 others.

All four of those removed were from the United States. Seven of the 13 entities that we added in this month's list were from the United States, including Bermuda and the Cayman Islands, four were from Europe and one each was from Asia-Pacific and Latin America.

The following entities were removed from the list:

• Dex One Corp. was removed after S&P revised the ratings to outlook developing;

• Quicksilver Resources Inc. was removed after S&P revised the rating outlook to stable; and

• AGS Holdings LLC was removed after the agency withdrew the ratings on GMX Resources Inc. following the revision of that company's rating to SD.

Meanwhile, S&P added the following entities to the list:

• AEG Power Solutions BV, Riviera Holdings Corp., Parques Reunidos Servicios Centrales, SAU, Chester Downs and Marina LLC and Deluxe Entertainment Services Group Inc. were added after S&P revised the outlooks to negative;

• Lantiq Beteiligungs - GmbH & Co. KG and Enterprise Networks Holdings BV were added after S&P placed the outlooks on CreditWatch with negative implications;

• American Media Inc. was added after S&P downgraded the entity to B-;

• Black Elk Energy Offshore Operations LLC, Administradora Baia Formosa SA and Aspect Software Inc. were added after S&P downgraded them and revised their outlooks to negative from stable; and

• Broadlands Finance Ltd. and Linc USA GP were newly rated entities.

S&P said the United States has the highest number of weakest links with 59.1% of the global total. By volume, the 81 U.S.-based weakest links account for about $171.4 billion of debt, which represents 71.3% of the total of $240.5 billion for all weakest links.

Sector breakdown

By sector, S&P said the media and entertainment, forest products and building materials and metals, mining and steel sectors are most vulnerable to default.

The agency said the media and entertainment sector has the greatest number of weakest links, with 38 entities, 27.7% of the total. The forest products and building materials follows, with 10 entities, or 7.3%, while the metals, mining and steel sector has nine entities, or 6.6%.

Default rate forecast

S&P said its baseline forecast, with a 60% probability, is for a 12-month-forward speculative-grade default rate of 3.7% in the United States.

To realize the baseline projection, a total of 57 speculative-grade-rated issuers would need to default during the 12 months ending in June 2013, for an average of 4.8 defaults per month. S&P said this is higher than the average of 3.4 defaults per month during the last 12 months.

The agency said its optimistic default rate forecast assumes a much improved U.S. economy, buoyed by a faster rebound in the housing sector, an improving labor market that spurs consumer spending and a stronger global economy, including a speedier resolution of the sovereign crisis in Europe.

As a result, S&P said it would expect the default rate to decline to 2.2% by June 2013, or 34 defaults during the next 12 months, from the June 2012 default rate of 2.7%.

On the other hand, S&P said its pessimistic scenario assumes a protracted and deeper sovereign crisis in Europe, resulting in loss of investor confidence and the United States experiencing another recession in the second half of 2012.

In addition, the agent said U.S. lawmakers face political gridlock on budget deficit issues before and after the presidential election in November, which in turn, further erodes consumer confidence and restrains consumer spending.

Under this pessimistic case, S&P said it expects the default rate to rise to 5.5%, or 85 defaults during the next 12 months.

Leveraged loans

The 12-month-trailing default rate for U.S. leveraged loans, which is based on the number of loans, increased to 1.21% in August from 1.06% in July, S&P reported.

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