Capital Markets

Heads Up for a Default Deluge

More companies are on the edge than ever before, Standard & Poor's says.
Stephen TaubMarch 27, 2009

Credit defaults are more likely now than at any time on record, according to a key measure employed by Standard & Poor’s.

The number of global “weakest links” increased to an all-time high of 297 as of March 11. It was the 13th consecutive month of an increase in that number, which is now nearly three times greater than it was a year ago, according to the credit-rating agency.

“Poor business prospects and still-tight credit conditions are putting pressure on many companies’ business models,” says Diane Vazza, head of S&P’s Global Fixed Income Research Group. “The marked increase in weakest links likely will lead to further credit degradation, as entities at the lower end of the ratings spectrum tend to be more volatile.”

Weakest links are defined as entities rated “B-” or lower with either a negative outlook or with ratings on CreditWatch with negative implications.

S&P warns that the sharp rise in weakest links is a precursor to more frequent defaults. It points out that historically, once companies qualify as weakest links, the likelihood that they will default escalates sharply in comparison with the rest of the speculative-grade segment. Weakest links accounted for 103 of the 126 companies that defaulted in 2008 and 34 of the 38 defaulters this year through March 20.

In a separate report, S&P notes that so far this year there have been 51 global corporate defaults — more than double the count at this time in 2008. Five defaulters in the past week or so were on the weakest links list.

S&P recently predicted that the U.S. corporate speculative-grade default rate will reach an all-time high of 13.9% later this year.

The 297 weakest links have combined rated debt worth $520 billion, according to S&P. More than half of them fall into one of five sectors: media and entertainment, forest products and building materials, retail and restaurants, consumer products, and automotive. “The concentration of weakest links in these sectors is not surprising given the current recessionary environment,” says S&P. “These sectors tend to follow the ebb and flow of the macro economy and are particularly sensitive to the cyclical characteristics of consumers’ spending patterns.”

U.S. weakest links account for $450 billion of the $520 billion, and almost half of the total outstanding U.S. speculative-grade debt, estimated at $1 trillion.


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