Bangkok--5 Jan--Standard & Poor's
Credit quality among U.S. speculative-grade issuers continued to deteriorate in November and early December, with 131 downgrades to just 10 upgrades since the end of October, said an article published today by Standard & Poor's. The article, which is titled "U.S. High-Yield Prospects: No Holiday Cheer For Risky Assets (Premium)," says that negative bias, the percentage of issuers on CreditWatch negative or with a negative outlook, has climbed to 37.5%, near a six-year high.
Distressed exchanges have increased in the last few months as firms attempt to stave off bankruptcy and garner better terms. There were 11 defaults in November, which pushed the 12-month-trailing speculative-grade default rate up to 3.15% from 2.86% in October. There were eight defaults in the first half of December. "We expect defaults to continue to rise over the coming months," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. Currently, 15% of the speculative-grade parent issuers are rated 'B-', and 9% are rated 'CCC+' or lower. "We expect that the 12-month-trailing issuer-based high-yield default rate will rise by September 2009 to 7.6% based on a baseline scenario or 9.6% based on a pessimistic scenario, which is growing ever more likely," Ms. Vazza added.
The Standard & Poor's high-yield composite index rose to 1,713 basis points (bps) on Dec. 23, 2008, up from 1,590 bps at the end of November and 1,383 bps at the end of October as investors continue to shun risky assets in favor of Treasuries. Much of the recent move in high-yield bond spreads has stemmed from the unprecedented drop in Treasury yields and less to do with a decline in high-yield bond prices. Indeed, the five-year Treasury yield has fallen to 1.35% on Dec. 19, down from 2.8% at the end of October.
We anticipate that the first quarter of 2009 might hold more of the same for secondary trading levels and high-yield primary markets. Ms. Vazza noted that, "Until there is some continued improvement in investment-grade bond spreads, it would be hard to expect much of a rally in high-yield. However, as Treasuries tighten to such low levels, portfolio managers could tiptoe into riskier assets in the first quarter of the year. For primary markets, we expect that high-yield issuance will remain limited, as high funding costs and limited investor demand will keep firms on the sidelines."
RatingsDirect is the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com. The standard version of this article is part of our standard Global Fixed Income Research content. The premium version contains expanded analysis of the article's most significant points, typically broken out by sector and region. Also in the premium version are in-depth charts and tables, the underlying data of which are available for download. 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:
David Wargin, New York (1) 212-438-1579, [email protected]
Analyst Contacts:
Diane Vazza, New York (1) 212-438-2760