Bangkok--19 Apr--Standard & Poor's
One global corporate issuer defaulted this week, bringing the 2010 year-to-date tally of global corporate defaults to 29, said an article published today by Standard & Poor's, titled "Global Corporate Default Update (April 9 - 15, 2010) (Premium)."
"By region, the current year-to-date default tallies are 21 in the U.S., one in Europe, two in the emerging markets, and five in the other developed region," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. (The other developed region is Australia, Canada, Japan, and New Zealand.)
So far this year, Chapter 11 filings account for 10 defaults, distressed exchanges account for nine, missed interest or principal payments are responsible for five, regulatory directives and receiverships account for one each, and the remaining three defaulted issuers are confidential.
Of the global corporate defaulters in 2010, 35% of issues with available recovery ratings had recovery ratings of '6' (indicating our expectation for negligible recovery of 0%-10%), 15% of the issues had recovery ratings of '5' (modest recovery prospects of 10%-30%), 15% had recovery ratings of '4' (average recovery prospects of 30%-50%), and 15% had recovery ratings of '3' (meaningful recovery prospects of 50%-70%). And for the remaining two rating categories, 15% of the issues had recovery ratings of '2' (substantial recovery prospects of 70%-90%) and 5% of issues had recovery ratings of '1' (very high recovery prospects of 90%-100%).
Ultimate recovery rates displayed considerable cyclicality in 2009, in sync with the ebb and flow of liquidity. A particular instrument's position in the capital structure, its security and collateral, company-specific issues, and economic and credit market conditions are the main factors that influence a recovery rate. Preliminary data for 2009 suggest that the shock to liquidity from events such as the Lehman Brothers' bankruptcy in the fall of 2008 severely affected exit valuations of defaulted securities, as well as the values of nondefaulted securities. Recoveries, which had experienced a golden age of extremely high rates during 2003-2007, dropped precipitously in 2009, in line with our expectations. By early 2009, recovery rates dropped to 39% for loans and revolving credit facilities and 34% for bonds (on a mean discounted basis in the first four months) from 74% and 51%, respectively, for all of 2008. The rebound in capital market sentiment boosted recovery rates later in the year, and by July 2009, recovery rates began to increase from these troughs.
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.
This article is part of our premium Global Fixed Income Research content, which is available to premium subscribers to RatingsDirect on the Global Credit Portal at www.globalcreditportal.com and to RatingsDirect at www.ratingsdirect.com. Ratings information can also be found on Standard & Poor's public Web site by using the Ratings search box located in the left column at www.standardandpoors.com. Members of the media may request a copy of this report by contacting the media representative provided.
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