S&P: Default Rate to Drop to 2.8%
July 22, 2010
Standard & Poor’s projects that the U.S. speculative-grade default rate will drop to 2.8% by June 2011, the rating agency said in a report Wednesday. Alternative scenarios project a default rate as low as 2.5% on the optimistic end and 4.5% on the pessimistic end.
The report noted that the U.S. speculative-grade spread was 653 bps as of July 19, which is on the wide side of the spectrum. The spread was 534 bps at the end of April.
The high yield bond distressed ratio increased to 12.2% as of July 15, from 6.7% in April. The distressed ratio for leveraged loans rose to 9.4% in June 2010 from 8.6% in April.
The rating agency said that companies in the speculative-grade space still faced significant refinancing and default risk.
“Beyond the one-year forecast horizon, we believe residual default risk could increase because of the significant overhang of surviving leveraged corporate issuers and the sizable amount of debt that is coming due,” S&P analysts said in the report. “Of the leveraged issuers originating from 2003 to 2007, more than 50% have survived. Unless top-lien growth improves significantly or leverage declines, these entities will likely continue to face high default risk, and we expect the survival rate will eventually decline.”
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