2010 U.S. Speculative-Grade Default Rate Expected At 5%; Bond-Market Revival Lowers Refinancing Risk, Article Says

Standard & Poor's updates its outlook for the issuer-based U.S. corporate speculative-grade default rate each quarter after analyzing the latest economic results and expectations. An article published today says that at the outset of 2010, financial conditions for leveraged issuers appear markedly better. The article, which is titled "U.S. Corporate Speculative-Grade Default Rate Projected At 5% In 2010 As An Eerie Calm Descends," says that liquidity concerns have eased, partly because of continued hefty support from the Fed and healthy investor demand and impressive activity in the financial markets, which have lowered refinancing risk. "For companies able to access the bond market to refinance upcoming loan or bond obligations, the current benevolent conditions are logically expected to lower corporate default risk in the near term," noted Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. "For other corporate borrowers that remain disproportionately dependent on bank financing, the future is cloudier, given banks' continued predisposition to shrink loan books. Those with the greatest refinancing risk exposure are issuers with ultra-low ratings that are concentrated in property-related or consumer discretionary sectors."


Our year-end 2010 baseline projection for the U.S. corporate speculative-grade default rate is now 5.0%, with alternative scenarios of 6.9% at the pessimistic end and 4.3% at the optimistic. The baseline is lower than the 6.9% projection we forecasted for the third quarter of 2010.

"This does not mean that corporate default risks are permanently lower," Ms. Vazza cautioned. "The ranks of surviving low-rated companies remain large by historical standards." The extent of decline in risk premiums for lower-rated borrowers and the return of what we view as questionable practices in some recent deals—such as raising bond funds to pay out shareholder dividends or sponsors—further raises concerns that the optimism might be overdone. Without a revival in top-line earnings and growth, many of the surviving leveraged issuers originated during 2003-2007 could face renewed default risk beyond the forecast horizon unless they significantly reduce their debt burdens.

Ms. Vazza has recorded a podcast to complement this article. This podcast, which will be available shortly, can be found at www.podcasts.standardandpoors.com.

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