Capital Markets

U.S. Defaults Keep Soaring

Global study by S&P shows 33 companies defaulting so far in 2008, 11 more than in all of 2007 — and 32 of them are American.
Stephen TaubJune 17, 2008

So far this year, 33 companies have defaulted world-wide, affecting debt worth $38.3 billion and surpassing the 22 defaults recorded in all of last year, according to Standard & Poor’s. Of the globe’s defaulting companies, 32 are based in the U.S., with the other in Canada.

The U.S. also leads in the number of “weakest links” — entities that are closest to the default threshold — with 117 of the 140 entities, or 84 percent of the total, according to the credit rating agency. Meanwhile, the 12-month-trailing global corporate speculative-grade bond default rate increased to a 31-month high of 1.45 percent in May from 1.29 percent the previous month.

Even so, keep in mind that for 52 consecutive months the default rate has remained below is average of 4.35 percent over the long-term, defined as 1981-2007. Still, S&P is keeping its mean baseline U.S. speculative-grade default rate forecast at a sky-high 4.7 percent. To reach that percentage, 74 entities must default in the next 12 months, it notes.

Broken down by region, the speculative-grade default rate increased to 1.89 percent in the U.S. but held steady at 0.50 percent in Europe and 0.17 percent in the emerging markets.

“The increase in defaults reflects the unfolding recessionary conditions, weaker earnings prospects, and continued financial pressures that will increase lending constraints,” says Diane Vazza, head of S&P’s Global Fixed Income Research Group. “Continued financial-market volatility, tightening credit conditions, protracted housing correction, dollar weakness, and the impact high energy prices contribute to substantial variability in the default forecast. A material risk remains that defaults could be significantly more pronounced and severe, especially if the recession would be deeper and longer than expected.”

Given the deterioration in the credit markets, it is not too surprising that savvy investors are eyeing the distressed debt market to take advantage of the growing number of crumbling companies.

In recent weeks alone, a number of private equity firms have each raised — or are in the process of raising — money for new funds dedicated to this market. For example, H.I.G. Capital has said that its distressed debt affiliate, Bayside Capital, held a first and final closing on its H.I.G. Bayside II fund with total commitments of $3 billion. It will target stressed and distressed middle market and lower middle market investment opportunities.

“We believe the current environment, characterised by a combination of credit and leverage contraction and a slowing economy, will present numerous investment opportunities for Bayside,” Sami Mnaymneh and Tony Tamer, co-founders and Managing Partners of H.I.G. Capital, in a press release.

Meanwhile, GSO, part of Blackstone Group, is trying to raise $1.5 billion for a new distressed fund while Monarch, a spinoff of Quadrangle Group LLC, is looking to raise $600 million, according to Bloomberg.

Bloomberg also reported that Cerberus Capital Management is launching a new fund to invest in distressed assets.