Bangkok--31 Aug--Standard & Poor's
Two global corporate issuers defaulted this week, bringing the 2009 year-to-date tally to 211 issuers--nearly 4x the 55 defaults at this time in 2008, said an article published today by Standard & Poor's.
Both of this week's defaults were based in the U.S., bringing the default tallies by region to 151 issuers in the U.S., 13 in Europe, 34 in the emerging markets, and 13 in the other developed region (Australia, Canada, Japan, and New Zealand), according to the article, titled "Global Corporate Default Update (Aug. 21 - 27, 2009) (Premium)."
Note that we have revised the 2009 default figures from last week to include seven issuers that defaulted in July, but whose rating histories were previously unavailable, and to remove three issuers that were downgraded to 'R' (indicating regulatory supervision) but that have not defaulted on a payment.
Both defaulted issuers this week missed interest payments, which so far have been the leading reason for default this year, accounting for 73 defaulted issuers. Distressed exchanges follow closely behind at 72 issuers. The number of distressed exchanges has soared this year, with the current tally of 73 issuers at more than 4x the full-year 2008 total and more than 18x the count of four issuers in 2007.
The number of bankruptcy filings also has surged, with 54 issuers so far this year having filed for bankruptcy protection, which surpasses the full-year 2008 total of 49 bankruptcy-related defaults. The sharp increase in corporate bankruptcies brings with it significant difficulties to private equity investors, particularly for those whose buyout activities in the past several years placed much of their risks squarely in the speculative-grade domain. Indeed, more than half of the defaulters this year either had or continue to have private equity involvement, which presents both challenges and opportunities to private equity investors during restructuring and reorganization.
Of the global corporate defaulters so far this year, 40% of issues with available recovery ratings had recovery ratings of '6' (indicating our expectation for negligible recovery of 0%-10%), 16% of issues had recovery ratings of '5' (modest recovery prospects of 10%-30%), 12% had recovery ratings of '4' (average recovery prospects of 30%-50%), and 11% had recovery ratings of '3' (meaningful recovery prospects of 50%-70%). And for the remaining two rating categories, 11% of issues had recovery ratings of '2' (substantial recovery prospects of 70%-90%) and 10% of issues had recovery ratings of '1' (very high recovery prospects of 90%-100%).
The precipitous increase in defaults reflects a pronounced decline in economic fundamentals and earnings prospects, as well as the continued unfavorable environment for the lowest rungs of the ratings latter, effectively halting lending to low-rated speculative-grade borrowers. A large number of defaults likely will be concentrated in the first two or three quarters of 2009 as a result of these factors, coupled with distressed exchange offers. Four other factors make the current environment more conducive to defaults: deep recessionary conditions in the U.S., a record-high proportion of issuers with speculative-grade ratings, the highest volume of low-rated issuance since 2003, and the seasoning of much of the debt rated 'B-' or lower issued in the past several years.
Because of these factors, our current 12-month-trailing U.S. corporate speculative-grade default rate forecast is 13.9% by mid-2010, with a pessimistic scenario of 18% and an optimistic scenario of 11.4%.
This article is part of our premium Global Fixed Income Research content, which is available to premium subscribers to RatingsDirect, at www.ratingsdirect.com. Ratings information can also be found on Standard & Poor's public Web site at www.standardandpoors.com; under Ratings in the left navigation bar, select Find a Rating. Members of the media may request a copy of this report by contacting the media representative provided.
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