Bangkok--31 Aug--Standard & Poor's The high-yield market succumbed to heightened instability in August, as credit market conditions deteriorated from fears over subprime exposure and accentuated hedge-fund liquidations in related areas, according to an article published today by Standard & Poor's. The report, titled "U.S. High-Yield Prospects: Winter In August Sends Chill," states that the new issue market for speculative-grade bonds has been frozen; few deals being done since the end of June. "The red-hot leveraged-loan market has cooled, leaving many deals still on the forward calendar or abandoned altogether. Investors, however, have clamored for high-grade paper, as inverse inquiries have helped prompt $51 billion in bonds rated by Standard & Poor's to come to market in August," said Diane Vazza, head of Standard & Poor's Global Fixed Income Group. "With risk appetite diminished, we expect that riskier speculative-grade firms will have trouble accessing credit markets until investors warm back up to risk. However, outlandish leverage levels are likely to receive much greater scrutiny even after the market stabilizes." Rollover dislocations from the ABCP market caused further fright. Even though problems did not specifically emerge from high-yield credits, this market (along with others) was not immune to the broad repricing of risk that occurred as investors were forced to sell liquid assets to cover losses on illiquid ones. In response, spreads on speculative-grade bonds blew out to 455 basis points (bps) on Aug. 20, 37 bps wider than at the end of July and 186 bps more than three months earlier. In mid-August, the VIX topped 30 for the first time since March 2003. Wild gyrations in the credit derivatives market caused spreads on highly rated names to widen out 200 bps-600 bps, as vanishing liquidity caused bid-ask spreads to gap out and little interest was shown in selling protection by market participants. Amid this turmoil, broad-based measures of credit market performance—e.g., downgrade ratios, potential downgrades, and default rates—have remained fairly stable. A continuation of the recent financial volatility would certainly spill over into fundamental indicators of corporate health, which have so far been propped up by decent earnings and profits performance. We would not be surprised if buyers of spread products (including high yield) stay on hold in the near term, waiting for the Federal Reserve to do more than cut the discount rate, especially given that fed fund futures are pricing in very high odds of a 25 bps rate cut at the next Federal Open Market Committee meeting on Sept. 18.Ms. Vazza added, "We are currently holding our speculative-grade default forecast at 1.4% by year-end 2007. Large leverage multiples among many speculative-grade firms and high issuance at the 'B-' and below rating level has increased the market's default pressure. However, we expect a fairly slow pace for corporate defaults for the rest of 2007, as structural concessions could push some potential defaults into the next year. The main risk to this forecast is that defaults could be at a more rapid pace, especially if firms' inability to access credit markets is prolonged beyond a reasonably expected term." The report is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to [email protected]. Ratings information can also be found on Standard & Poor's public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search. Members of the media may request a copy of this report by contacting the media representative provided. Media Contact: Mimi Barker, New York (1) 212-438-5054, [email protected] Analyst Contact: Diane Vazza, New York (1) 212-438-2760 Standard & Poor's, a division of The McGraw-Hill Companies (NYSE:MHP), is the world's foremost provider of financial market intelligence, including independent credit ratings, indices, risk evaluation, investment research and data. With approximately 8,500 employees, including wholly owned affiliates, located in 21 countries. Standard & Poor's is an essential part of the world's financial infrastructure and has played a leading role for more than 140 years in providing investors with the independent benchmarks they need to feel more confident about their investment and financial decisions. For more information, visit http://www.standardandpoors.com. Key Contacts: Americas Media Relations: (1) 212-438-6667 media_ [email protected] Americas Customer Service: (1) 212-438-7280 [email protected]