VideoIt seems the world is becoming safer for lenders.
Not only is global debt issuance at record levels, the quality of the issues outstanding is steadily improving. In fact, according to a recent report by Standard & Poor's, credit downgrades exceeded upgrades by the smallest margin since the first quarter of 2000.
The improvement in credit quality, however, is not restricted to investment-grade issuers.
A new Moody's Investors Service report shows that, in June, the global speculative-grade corporate bond default rate fell once again. That's the fifteenth straight month of declines since the default rate peaked at 10.9 percent in January 2002.
In its the S&P report, the credit rating specialist noted that the global ratio of downgrades-vs.-upgrades for all financial and non-financial issuers fell to 3.1 during the second quarter. That's down from a 4.6 ratio in the first quarter and 4.2 ratio for all of 2002.
Specifically, in the second quarter there were 216 downgrades (covering $364 billion in debt), one fewer than in the first quarter of the year. Moreover, S&P says there were 69 credit upgrades (covering $141.8 billion in debt), a big jump from the 47 upgrades recorded in Q1.
"The distribution of outlooks and CreditWatch listings indicates that credit quality retains a favorable bias," said credit analyst Diane Vazza, head of Standard & Poor's Global Fixed Income Research.
Looking at another measure of credit quality, the proportion of companies listed with a negative bias declined to 29.9 percent at the end of the June period, compared with 32.3 percent at the end of the prior quarter.
Meanwhile, the proportion of entities listed with a positive bias increased to 7.9 percent versus 7.4 percent at the end of March. In addition, the proportion of issuers with stable outlooks rose to 62.1 percent versus 60.4 percent in the same period.
"During the second quarter, new issue activity picked up pace in almost all regions in response to favorable market conditions for borrowers, even though many of the fundamental drivers of issuance -- e.g. capital spending and capacity utilization -- have not yet shown a convincing turnaround to sustain this pace," Vazza said.
Altogether, 69 companies have defaulted on $34.1 billion of rated debt during 2003, worldwide. This compares with 235 companies that defaulted on $181.7 billion of rated debt during all of 2002.
Of the 69 companies that defaulted during the first half of 2003, 54 were in the U.S., followed by four in the U.K. and three each in Canada and Mexico. Of the $34.1 billion of defaults in corporate debt, $23.5 billion was from the U.S. and $6.9 billion was from the E.U.
Meanwhile, the credit quality of speculative-grade bonds is improving as well.
By S&P's count, at the end of June the global 12-month rolling speculative-grade default rate was 5.26 percent, down from 6.86 percent at the end of March and 11.26 percent 12 months earlier.
According to Moody's, the global speculative-grade corporate bond default rate fell to 6.1 percent in June from 6.5 percent in May, marking the fifteenth monthly decline since the default rate peaked at 10.9 percent in January 2002.
The default rate for US-domiciled issuers dropped to 5.8 percent last month from 6.2 percent in May, after peaking at 11.6 percent in January 2002, Moody's pointed out.
The global default rate at the start of 2003 was 7.7 percent, and 6 percent for U.S.-based issuers.
Still, the junk bond market is not exactly worry-free. "Even though aggregate credit conditions have improved since last year, the data still suggest an above-average global default rate over the next year," said David T. Hamilton, Moody's director of default research. "Our forecasting model predicts that the default rate by number of issuers will be unchanged a year from now from the current 6.1 percent."
But Hamilton added if economic and credit conditions continue to show modest improvement, "it's possible that the default rate may end up somewhat below the forecasted level."
Indeed, the S&P study points out that the U.S. speculative-grade default rate has dropped below 6 percent for the first time since the final quarter of 2000. What's more, the ratings company expects the U.S. speculative-grade default rate to drop to 4.5 percent.
For European debt issuers, the speculative-grade default rate fell to 10.9 percent last month from 12.8 percent in May. That's a big falloff from the 21.9 percent recorded at the start of this year. The default rate for European-domiciled issuers peaked at 22.7 percent in September 2002.
Altogether, 20 issuers rated by Moody's defaulted during the second quarter on a total of $8 billion of paper. In the second quarter of 2002, 40 corporate bond issuers defaulted on $42 billion of bonds.
The largest defaulters in 2003's second quarter were Fleming Cos. ($1.6 billion), Air Canada ($1.2 billion) and Westpoint Stevens ($1 billion).
On a dollar basis, the healthcare sector has been the unhealthiest, with a total of $4.9 billion of defaulted debt from three issuers during the first half of 2003. The telecommunications/media sector took second place, with nine defaults totaling $3.3 billion. Four transportation sector defaults totaling $2.2 billion placed that industry in third place.
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