Capital Markets

Global Junk Defaults at Record Low

Junk-rated companies the world over continue to defy predictions that they can't all keep paying their bills.
Stephen TaubSeptember 21, 2006

The global junk bond default rate fell to a record low of 1 percent in August, according to a new report issued by Standard & Poor’s Ratings Services. In July, the rate was 1.03 percent. The rating agency also pointed out that the default rate has been below its long-term (1981-2005) average of 4.61 percent for 31 consecutive months.

In the U.S., the default rate was 1.44 percent, compared with 0.53 percent in Europe, and zero in the emerging markets. However, as has previously reported, this improving trend could be short-lived.

S&P said the number of weakest link issuers climbed to its highest level in 20 months. S&P defines weakest-link issuers as those rated “CCC” or lower with either a negative outlook or ratings on CreditWatch with negative implications.

As of September 13, 25 weakest links remained vulnerable to default on combined rated debt worth $10.2 billion. This is five greater than reported last month and equivalent to the number reported in January 2005.

“Despite the August decline, our prediction remains that the default rate will edge up slowly from its 2006 trough,” said Diane Vazza, managing director and head of S&P’s Global Fixed Income Research, in a press release. S&P expects U.S. speculative-grade bond default rates to rise over the next few quarters, reaching 2.1 percent by year-end 2006, roughly on par with year-end 2005. In fact, S&P notes that the U.S. junk bond default rate will likely top 3.5 percent by the first quarter of 2008. However, it emphasizes that this is well below the long-term average of 4.7 percent.

4 Powerful Communication Strategies for Your Next Board Meeting