Global default rates fell to 5.2% at the end of September, maintaining the slide that has been in place for several months, Standard & Poor’s Ratings Services claim. The current rate is infinitesimally above the long-term (1981-present) average of 5.17%. The decline in the speculative-grade default rate has been accompanied by an easing of lending conditions, as reported in recent surveys conducted by the US Federal Reserve and the European Central Bank.
“Falling default rates have also enhanced issuance conditions in the speculative grade bond markets on both sides of the Atlantic – even though they are still at odds with the current trends in the industrial sector, a testimony to the fact that the manufacturing sector remains a laggard in this current gradual recovery cycle,” Diane Vazza, head of Standard & Poor’s Global Fixed Income Research group, says.
For instance, industrial production – generally regarded as a fairly good leading indicator of the speculative grade default rate – remained in negative territory in the US for the fifth consecutive month and below zero in Europe for the fourth consecutive month. Data on orders – nondurable and durable – indicate that strength in manufacturing is rebuilding gradually. If the negative trend were to be sustained over a longer period of time, however, fears of a renewed deterioration in credit quality and the default rate could surface.
On a 12-month rolling basis, a global speculative grade default rate of 5.2% was reported at the end of September, compared with 9.37% at year-end 2002. The US recorded a speculative grade default rate of 5.92%, well below the 7.44% recorded in December 2002. European default rates nudged up higher to 5.06% at the end of September compared to 4.7% in August but still well below the 13.87% in December. Declines were also observed in the emerging markets, which recorded default rates of 3.12% and 14.97% in the corresponding period. The slide in default rates has been accompanied by an easing of credit standards in both the US and Europe.
A total of 103 defaults have been recorded in the year to date on rated debt outstanding worth US$49.5bn. Of the total, 80 defaults were recorded in the US on rated debt worth US$37.3bn. As of September 30, a total of 39 entities still remained vulnerable to default. These “weakest link” issuers are defined as issuers that carry a credit rating of ‘CCC’ or lower and are listed either with a negative outlook or a CreditWatch with negative implications. The current list of 39 is even with the number reported a month earlier. Of the 39 reported in September, one issuer defaulted, and another issuer is listed with a developing outlook. Meanwhile, two new issuers were added to the list.
By sector, telecommunications and media and entertainment continued to show the highest vulnerability for default among the “weakest links”. Of the 39 issuers on the most recent list, 35.9% (14 issuers in total) were from these two sectors. This concentration is in part the outcome of a heavy spate of issuance in 1997-99 at the lower rungs of the rating spectrum (‘B-‘ and below). Another sector that also showed vulnerability to default was retail/restaurants, with four issuers.
Geographically, US-based issuers featured disproportionately on the “weakest links” list, accounting for 35 of 39 issuers. This preponderance is attributable to the higher ratings penetration in the US marketplace. Elsewhere, one issuer each from Mexico, Argentina, Norway and the UK featured among the weakest links.