Bangkok--6 May--Standard & Poor's
As prices of high-yielding corporate bonds hurtle toward their par values, financial conditions for leveraged issuers appear favorable as of April 2010, said an article published today by Standard & Poor's Global Fixed Income Research.
Our baseline projection for the U.S. corporate speculative-grade default rate in the 12 months ending in March 2011 is 3.5%, with alternative scenarios of 4.9% at the pessimistic end and 3.0% at the optimistic, according to the article, titled "U.S. Corporate Speculative-Grade Default Rate Forecasted To Dip Below The Long-Term Average To 3.5% In March 2011."
"The cost of funding in the bond market has dropped to its lowest level in 2.5 years, and distress-related indicators have been receding steadily, reflecting an increase in investor demand and, as a result, lower refinancing risk," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research.
We suspect that companies are frontloading some of the bond issuance in anticipation of higher benchmark interest rates later in the year. Nevertheless, we expect easy access to cash and the proliferation of bond-for-loan takeouts to lower corporate default risk in the near term, particularly for issuers that are able to opportunistically tap the bond market.
Our baseline forecast for year-end 2010 was 5.0%, with alternatives of 6.9% (pessimistic) and 4.3% (optimistic), compared with a long-term (1981-2009) average of 4.5%.
"However, we believe residual default risk beyond the one-year forecast horizon could increase because of the significant overhang of surviving leveraged corporate issuers," said Ms. Vazza. The substantial decline in risk premiums for lower-rated borrowers and the return of what we view as questionable practices and structures in some recent deals--such as raising bond funds to pay out shareholder dividends or sponsors--further raise flags that the optimism might be overdone.
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Media Contact:
Mimi Barker, New York (1) 212-438-5054,
[email protected]
Analyst Contact:
Diane Vazza, New York (1) 212-438-2760
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