Capital Markets

A Banner Year for Defaults

There are more so far in 2008 that were seen all last year.
Stephen TaubMay 22, 2008

More than a week before the end of May, the number of debt defaults so far this year already exceeds the total for all of 2007.

Through May 13, there were 28 defaults, affecting debt worth $18.9 billion, according to a new report from Standard & Poor’s. Last year there was a total of 22 defaults, and in 2006 there were 30. Among this year’s defaults, 27 were from the United States, one was from Canada.

S&P also noted that as of May 13, there were 130 “weakest links” globally — the most in five years, according to the rating firm. These are defined as issuers rated “B-” or lower with either a negative outlook or CreditWatch ratings with negative implications. The 130 issuers, 82 percent of which are in the United States, are vulnerable to default on rated debt worth $127.4 billion.

Breaking it down by sector, media and entertainment, consumer products, and retail/restaurants continue to show the most vulnerability, with the highest concentration of weakest links for the 11th consecutive month. Of the 28 defaults in 2008, half were from these three sectors, according to the report.

The rising number of defaults is not very surprising, given the global credit crisis over the past year and the deterioration in the global economy.

Indeed, S&P predicts the U.S. speculative-grade default rate will rise to 4.7 percent over the next 12 months from a 25-year low of 0.97 percent recorded at the end of 2007. “The increase in defaults reflects the unfolding recessionary conditions, weaker earnings prospects, and continued financial pressures that will increase lending constraints,” said Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group.

S&P elaborated that continued financial-market volatility, tightening credit conditions, an unfolding housing correction, dollar weakness, and the unknown impact of the U.S. government’s fiscal stimulus package contribute to substantial variability in the default forecast.

The rating firm warned of a material risk that defaults could be significantly more pronounced and severe, especially if the recession were to be deeper and longer than expected.

In the leveraged-loan segment, Standard & Poor’s noted that its Leveraged and Commentary Data (LCD) group reported that the 12-month trailing institutional loan default rate reached a 25-month high of 1.95 percent in April, from 1.83 percent in March and 0.44 percent a year ago.