Bangkok--12 Oct--Standard & Poor's Volatility, which peaked in mid-August, appears to be retreating after the Federal Reserve cut the funds target rate by 50 basis points (bps) on Sept. 18, with the VIX falling below 20 on Sept. 19, the first time since July 26, according to an article published this week by Standard & Poor's. The report, titled "U.S. High-Yield Prospects: High-Yield Ship Steadies Amid Choppy Waters," said that in response to less volatility and easier money, spreads have eased to 413 bps on Sept. 26 from 446 bps before the rate cut. In addition, the credit default swap market, which experienced significant repricing and instability in late July and early August, has also begun to settle. "The high-yield primary market, which was stagnant in August and early September, is beginning to see some new deals, and investors have begun to absorb some of the supply overhang that has clogged the new deal flow," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. "As the market begins to move past the recent disruption, we expect spreads will settle, albeit at a higher level than in June." Issuance has remained slow in August and early September. Primary issuance in the high-yield market has almost been nonexistent, with zero rated issuance in August and $3.5 billion in September. The high-yield primary market averaged close to $17 billion a month through the first six months of 2007. Leverage-loan issuance was $3.6 billion in August, only a trickle compared with the $66.6 billion in June. However, the rate cut should help spur the market demand, and we expect to see issuance revive if investors, who have been on the sidelines during the past month, are convinced that systemwide repricing is over. Moreover, the market has already made a good first step as reports show that there was plenty of interest in the first part of the massive First Data loan offering. With more than $300 billion in unsold deals, and if underwriters can run down some of the backlog as we come out of the summer slump, the primary market in the late fall and early winter should be much more vibrant. Ms. Vazza added, "Defaults have been slow to materialize this year, though risks are on the rise for 2008, judging by the sharp acceleration in the number of firms trading at distressed levels. If the economy slows as forecasted, profit pressure should add stress to firms at the bottom of the ratings scale. If credit market conditions worsen, firms may be hard pressed to roll over debt, which will not bode well given the high-leverage multiples among many speculative-grade issuers. We are currently holding our speculative-grade default forecast at 1.4% by year-end 2007, based on the assumption that borrower-friendly terms will stave off a material increase in defaults until 2008." 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