Bangkok--8 Feb--Standard & Poor's
The 2010 year-to-date tally of global corporate defaults remains unchanged at 10 this week, said an article published today by Standard & Poor's. By region, the year-to-date default tallies are seven defaults in the U.S., two in the emerging markets, and one in the other developed region (Australia, Canada, Japan, and New Zealand).
So far this year, distressed exchanges account for five defaults, and missed interest or principal payments are responsible for three defaults, according to the article, titled "Global Corporate Default Update (Jan. 29 - Feb. 4, 2010) (Premium)." The remaining two issuers were confidential.
Despite unprecedented turbulence in the credit markets and record-high default volume since 2008, the ability of corporate credit ratings to serve as an effective measure of relative default risk remains intact. This is evidenced by several factors, such as 87% of the issuers that defaulted in 2009 were rated speculative grade ('BB+' and lower) prior to default, investment-grade-rated issuers ('BBB-' and above) have a 99% survival rate within a one-year time horizon, and the majority of 2009's defaults stemmed from the weakest end of the credit spectrum, known as weakest links. Globally, 213 issuers are weakest links (entities rated 'B-' and lower with a negative outlook or ratings on CreditWatch negative), and the regional distribution of weakest links closely mirrors the default experience in 2009.
Our year-end 2010 baseline projection for the U.S. corporate speculative-grade default rate is now 5.0%, with alternative scenarios of 6.9% at the pessimistic end and 4.3% at the optimistic. The baseline is lower than the 6.9% projection we forecasted for the third quarter of 2010. This does not mean that corporate default risks are permanently lower.
We note that the ranks of surviving low-rated companies remain large by historical standards. The extent of decline in risk premiums for lower-rated borrowers and the return of what we view as questionable practices in some recent deals--such as raising bond funds to pay out shareholder dividends or sponsors--further raise concerns that the optimism might be overdone. Without a revival in top-line earnings and growth, many of the surviving leveraged issuers originated during 2003-2007 could face renewed default risk beyond the forecast horizon unless they significantly reduce their debt burdens.
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