Bangkok--29 Jan--Standard & Poor's Global bond markets have cause to be nervous on myriad fronts in early 2008, ranging from rising risk premiums, higher probability of downgrades, accelerated distress (from very low levels), and the looming specter of an eventual upswing in the default cycle from all-time lows, according to a report published today by Standard & Poor's. The report, titled "Global Corporate And Sovereign Rating Actions: Fourth-Quarter 2007 (Premium Edition)," says that much of the maelstrom in the short-term debt and mortgage-related markets has shaken investor sentiment considerably, even though collateral damage in the corporate bond market has so far been limited. "Credit quality will deteriorate from present levels, with downgrades and defaults picking up as the year progresses," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. "In contrast with 2007 and 2006, factors linked with underlying operating performance will propel the deteriorating credit quality to a greater extent rather than in response to bond-negative financial strategies, such as acquisitions, buybacks, and dividend payouts." Defaults will tick up from record lows near 1%, more meaningfully in the later half of 2008 and continuing into 2009. Our 12-month forward (November 2008) speculative-grade baseline default rate forecast is 3.4% in the U.S., much higher than the current level. Financial strategies implemented during the preceding five boom years have insulated even the most vulnerable entities, allowing them to continue meeting financial obligations and forestalling payment default, despite the tighter lending landscape. The default-rate trajectory should escalate over the next couple of years based on the cumulative impact of the changes in the credit-pricing environment, an increase in refunding needs, and a slowing economy. Moreover, spreads have risen by 222 bps since the start of the year, and 286 bps since their most recent low on June 13. Note that the increase in spreads accompanies a drop in the risk-free rate, therefore indicating that the corporate risk premium—or the compensation paid to investors to offset the risk embedded in corporate bonds—has risen sharply in response to the financial turmoil. In 2008, spreads are expected to remain elevated as long as the economy remains weak, profitability worsens, and downgrade/default pressures intensify. Ms. Vazza added, "Our projections are based on a decidedly gloomy economic outlook for 2008, underpinned by expectations that the world's largest economy will falter on the cliff of recession. The baseline forecast in the U.S. anticipates economic growth to average near 1% for the next three quarters. The housing decline will have its biggest negative impact during this period, and orders data suggest slower capital spending. A serious risk confronts the U.S. consumer, as households feel the pinch of lower home prices and higher energy costs." The report is available to RatingsDirect subscribers who have upgraded their package to include the Global Fixed Income Research add-on. RatingsDirect is 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 with the Global Fixed Income Research add-on, please contact your local Standard & Poor's representative or [email protected] for further information. 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.