Standard & Poor’s Ratings Services revised its ratings on two corporate issuers to ‘D’ this week, raising the 2011 global corporate default tally to 28, said an article published by Standard & Poor’s Global Fixed Income Research, titled “Global Corporate Default Update”.
S&P said that if the economic recovery remains slow the total number of corporate defaults expected to reach 64 by June 2012.
One of the issuers, US-based paper producer NewPage Corp., filed for Chapter 11 bankruptcy protection, and the other issuer was confidential. The tally of global corporate defaults in 2011 is slightly less than half the 61 issuers that defaulted by this time last year. Regionally, 19 of the defaulters this year were based in the US, three were based in New Zealand, two were in Canada, and one each was in the Czech Republic, France, Israel, and Russia.
Of the total defaulters by this time in 2010, 44 were US-based issuers, eight were in the other developed region (Australia, Canada, Japan, and New Zealand), seven were from the emerging markets, and two were European issuers.
“Twelve of this year’s defaults were due to missed interest or principal payments and six were due to distressed exchanges, both among the top reasons for default in 2010. Of the remaining 10, five issuers defaulted after they filed for bankruptcy, another two were forced into liquidation as a result of regulatory actions, the eighth had its banking license revoked by its country’s central bank, the ninth was appointed a receiver, and the 10th was confidential. Of the defaults in 2010, 28 defaults resulted from missed interest or principal payments, 25 resulted from Chapter 11 and foreign bankruptcy filings, 23 from distressed exchanges, three from receiverships, one from regulatory directives, and one from administration,” S&P explained.
Standard & Poor’s expects the US corporate trailing 12-month speculative-grade default rate to decline to 1.6% by June 2012. A total of 25 issuers would need to default from July 2011 to June 2012 to reach this forecast. By comparison, the default rate in June 2011 is 2.25%. In the 12 months ended June 2011, 32 speculative-grade issuers defaulted. Less than one-third of those defaults occurred in the first half of 2011. Improved lending conditions and greater availability of capital, even for low-rated issuers, continue to temper our default expectations in the short term. In addition, stronger credit quality, as reflected by fewer downgrades and lower negative bias, should help companies mitigate the effects of lackluster economic growth and uncertainty about domestic and international sovereign funding.
In addition to our baseline projection, S&P added, we forecast the default rate in our optimistic and pessimistic scenarios. In our optimistic default rate forecast scenario, the economy and the financial markets improve more than expected, and, as a result, we would expect the default rate to be 1.2% (18 defaults in the next 12 months).
On the other hand, it said, if the economic recovery stalls and the financial markets deteriorate–which is our pessimistic scenario, we expect the default rate to be 4% (62 defaults) by June 2012. “We base our forecasts on quantitative and qualitative factors that we consider, including, but not limited to, Standard & Poor’s proprietary default model for the US corporate speculative-grade bond market. We update our outlook for the US issuer-based corporate speculative-grade default rate each quarter after analyzing the latest economic data and expectations.”