Capital Markets

Year’s Defaults Soar Past a Quarter-Trillion

Of the 85 global defaults in 2008 so far, 70 are U.S. companies, S&P says.
Stephen TaubNovember 18, 2008

Even as credit markets start to thaw, the residual damage among existing issues gets ever worse.

Through the second week of November, 85 companies around the globe had defaulted this year, affecting debt worth a whopping $284 billion, according to Standard & Poor’s. In all of 2007, only 22 defaults were recorded, and 30 companies defaulted in 2006.

Of the 85 defaults, 70 were based in the U.S.

The U.S. also leads in the number of what S&P calls weakest links: 156 of the 207 entities, or 75 percent. Companies in that category are defined as issuers rated ‘B-‘ or lower, either with a negative outlook or ratings on CreditWatch with negative implications. These qualities put the companies at greater risk of default.

As a result, S&P predicts that the U.S. speculative-grade default rate will climb to 7.6 percent in the next 12 months through October 2009. This would compare to a 2.86 percent trailing-12-month default rate in October 2008 and the 25-year low of 0.97 percent in December 2007.

Investors are apparently leery of investing in this paper. Thanks to volatility in the financial markets and uncertainty in the economy, the U.S. speculative-grade spread recently surged to 1,416 basis points from 1,383 basis points at the end of October, 919 points at the end of September, and 561 points at the beginning of the year.

“Continued credit quality erosion, including high default expectations in the next few quarters, should keep high-yield spreads elevated,” S&P warned.

The prospects for U.S. leveraged loans are not too good either. The 12-month-trailing default rate (based on the number of loans) increased to a 65-month high of 3.59 percent in October from 3.32 percent in September 2008 and just 0.40 percent in October 2007, according to Standard & Poor’s.