Global Weakest Links And Default Rates: The Global Default Rate Continues To Increase

The number of global weakest links decreased to 123 on Feb. 17 from 131 on Jan. 20. Weakest links are issuers rated 'B-' and lower with either negative outlooks or ratings on CreditWatch with negative implications. The 123 weakest links have total rated debt worth $206.4 billion.

In 2012, 17 issuers so far have defaulted (through Feb. 17), including confidential entities. These defaulted issuers have outstanding debt worth $13.2 billion. In 2011, 53 defaulted issuers had combined outstanding debt worth $87.7 billion. By comparison, 82 issuers defaulted on debt worth $97.5 billion in 2010, and 264 issuers defaulted on debt worth $627.7 billion in 2009.

The highlights from this month's report are:

• The 12-month-trailing global corporate speculative-grade default rate increased to 2.13% from 1.71% in December. Regionally, the U.S. corporate speculative-grade corporate default rate also increased to 2.43% from 1.98%, and the European default rate grew to 2% from 1.6%. The default rate in the emerging markets increased to 0.88% from 0.59%.
• The U.S. leads the weakest links, with 76, or 62% of the global total. By sector, media and entertainment, banks, forest products and building materials, and consumer products have the greatest concentrations of weakest links.
• The U.S. economy grew at an annualized rate of 2.8% in the fourth quarter, as per the advanced estimates. In the third quarter, the GDP grew by 1.8%. We forecast that it grew by 1.9% in the fourth quarter. In view of a slow recovery, the Fed announced that it expects short-term interest rates to stay near zero until late 2014, longer than the mid-2013 timeline it previously announced.
• In the U.S., 26 new speculative-grade deals came to market in February 2012 (through Feb. 17), following 32 deals in January and 10 deals in December.
• The U.S. speculative-grade spread started increasing at the beginning of August because of growing uncertainty in the global financial markets and peaked at 830 basis points (bps) on Oct. 4. Since then, the spread has been falling gradually. It ended the month of January at 684 bps and declined further to 656 bps as of Feb. 14, 2012.
• Our baseline forecast (with a 60% probability) is for a 12-month-forward (December 2012) corporate speculative-grade default rate of 3.3% in the U.S. (see chart 4). To realize the mean baseline projection, a total of 51 speculative-grade-rated issuers would need to default in the next 12 months. This implies an average of about 4.25 defaults per month, higher than the average of about 2.3 defaults per month in the last 12 months. (For more details, see, "Default, Transition, and Recovery: The U.S. Corporate Default Rate Is Forecasted To Rise To 3.3% In 2012," published Feb. 2, 2012, on RatingsDirect.)
• Our alternative default rate forecasts are 5.3% for the pessimistic scenario and 1.8% for the optimistic scenario. From January 2012 to December 2012, 81 issuers would have to default to reach the pessimistic default rate forecast, and 28 issuers would have to default to reach the optimistic forecast.
• The 12-month-trailing default rate for U.S. leveraged loans (based on the number of loans) declined slightly to 0.61% in January from 0.62% in December.

Monthly Movements In Default Rates

Globally, the 12-month-trailing corporate speculative-grade default rate increased in January to 2.13% from 1.71% in December (see table 1 and chart 1). In the U.S., the corporate speculative-grade default rate increased to 2.43% from 1.98%. The European speculative-grade default rate grew to 2% from 1.6%, and the emerging markets default rate increased to 0.88% from 0.59%.

Table 1

Chart 1

The general decline in default rates since November 2010 reflects an improvement in the credit markets. Nonetheless, the transportation, forest and building products/homebuilders, and consumer/service sectors have significantly higher default rates than other sectors (see table 2). These sectors' results reflect a slow recovery, the sectors' cyclicality, and dependence on strong consumer spending.

Table 2

In 2012 (through Feb. 17), global corporate defaults, including confidential defaulters, totaled 17 and accounted for $13.2 billion in debt (see table 3). In comparison, in 2011, 53 seven entities defaulted, amounting to $84.3 billion, and 82 issuers defaulted in 2010, affecting debt worth $97.5 billion, down from 264 defaulters in 2009 ($627.7 billion) and 126 defaulters in 2008 ($432 billion).

Eight entities have defaulted (excluding two confidential) since our most recent weakest links report (through Feb. 17):

• On Jan. 25, 2012, Standard & Poor's Ratings Services lowered its long-term corporate credit rating on Switzerland-based refiner Petroplus Holdings AG (Petroplus) to 'D' (default) from 'CC'. The downgrade reflects our understanding that Petroplus has received notices of acceleration from its banks under its $2.1 billion committed and uncommitted revolving credit facilities. (For more details, see "Research Update: Petroplus Holdings Long-Term Rating Lowered To 'D' On Notice Of Acceleration By Banks Under Revolving Credit Facility," published on Jan. 25, 2012.)

• On Jan. 26, 2012, Standard & Poor's lowered its unsolicited financial strength rating on U.S.-based insurance player Republic Mortgage Insurance Co. (RMIC) to 'R' from 'CC', signifying that the company is under regulatory supervision, after the North Carolina Department of Insurance placed the company under its supervision. (For more details, see "Research Update: Republic Mortgage Insurance Co. Rating Lowered To 'R' From 'CC' On Order Of Supervision," published on Jan. 26, 2012.)

• On Jan. 31, 2012, Standard & Poor's lowered its long-term corporate credit rating on China-based advanced in-vitro diagnostic company China Medical Technologies Inc. (CMED) to 'SD' from 'B+'. At the same time, Standard & Poor's lowered the debt rating on the $150 million convertible bond due Dec. 15, 2016, to 'D' from 'B+'. The downgrade follows confirmation that CMED did not make the semiannual interest payment on its 6.25% $150 million convertible bond due December 2016; the coupon payment was due on Dec. 15, 2011. The company also failed to make the payment within the 30-day applicable grace period ended Jan. 14, 2012. (For more details, see "Research Update: China Medical Technologies Inc. Rating Lowered To 'SD' On Missed Coupon Payment; Issue Rating Lowered To 'D’," published on Jan. 31, 2012.)

• On Feb. 6, 2012, Standard & Poor's lowered its long-term corporate credit rating on U.S.-based building materials company Tensar Corp. to 'SD' from 'CCC'. We also lowered the issue-level rating on TCO Funding Corp.'s first-lien term loan to 'D' from 'B-.' The rating actions reflect that TCO Funding Corp., an entity formed to comply with Islamic Shari'ah financing rules, did not make its quarterly amortization payment on its first-lien term loan. (For more details, see "Research Update: Tensar Corp. Rating Lowered to 'SD' From 'CCC' On Missed Principal Payment; First Lien Loan Rating Lowered To 'D'," published on Feb. 6, 2012.)

• On Feb. 6, 2012, Standard & Poor's lowered its corporate credit and senior secured debt ratings on U.S.-based aviation company Global Aviation Holdings Inc.'s senior secured notes to 'D' from 'CCC-'. The downgrade reflects Global's Chapter 11 bankruptcy filing on Feb. 5, 2012. High debt leverage and substantial debt service requirements made Global especially vulnerable this past year. (For more details, see "Research Update: Global Aviation Holdings Inc. Downgraded To 'D' After Chapter 11 Filing," published on Feb. 6, 2012.)

• On Feb. 10, 2012, Standard & Poor's lowered its long-term corporate credit rating on Indonesia-based sea freight transportation company PT Berlian Laju Tanker Tbk. (BLT) to 'D' from 'CC'. We also lowered the issue rating on its $400 million senior unsecured notes due 2014, issued by BLT Finance B.V., a wholly owned subsidiary of BLT, to 'D' from 'C'. The rating action follows BLT's failure to make ship-lease payments to at least one company. Therefore, a failure to honor contractual financial obligation constitutes a default. (For more details, see "Research Update: PT Berlian Laju Tanker Tbk. Rating Lowered To 'D' From 'CC' On Nonpayment Of Leases," published on Feb. 10, 2012.)

• On Feb. 13, 2012, Standard & Poor's lowered its corporate credit rating on U.S.-based home improvement retailer DirectBuy Holdings Inc. to 'D' from 'CC'. The downgrade follows DirectBuy's missed interest payment due Feb 1, 2011, on its $335 million senior secured notes. The company has been given a 30-day grace period to make the payment; however, considering its deteriorating operating performance and liquidity, we believe it is highly unlikely that DirectBuy will make the payment within the period. (For more details, see "Research Update: DirectBuy Holdings Inc. Downgraded To 'D' On Missed Interest Payment," published on Feb. 13, 2012.)

• On Feb. 16, 2012, Standard & Poor's lowered its corporate credit rating on U.S.-based Reichhold Industries Inc. to 'D' from 'CCC+'. We also lowered the issue-level rating on Reichhold's senior unsecured note to 'D' from 'CCC-'. The rating action follows Reichhold's failure to pay the scheduled interest on its $195 million senior unsecured notes that mature on Aug. 15, 2014. The semiannual interest payment was due Feb. 15, 2012. Reichhold has faced rising raw material costs and limited ability to increase prices due to weak end-market demand. (For more details, see "Research Update: Reichhold Industries Inc. Ratings Lowered To 'D' On Missed Interest Payment," published on Feb. 16, 2012.)

Table 3

In the leveraged loan segment, Standard & Poor's LCD reported that the 12-month-trailing institutional loan default rate (based on the number of loans) was 0.61% in January, a slight decrease from the previous month, but down significantly from 0.92% in October and 0.9% in September. The leveraged loan default rate has declined significantly since 2009 because of the stabilization of the credit markets and increased economic activity. The loan distress ratio (defined as the percentage of loans trading below 80 cents on the dollar) plunged to 5.8% in January from 6.5% in December (see chart 2).

Chart 2

This Month's Weakest Links

The number of global weakest links decreased to 123 as of Feb. 17 from 131 in the previous month and 111 a year ago. Many weakest links have already defaulted, and we expect that a large proportion of the defaults in the next few quarters will come from this group. The 123 weakest links account for a total of $206.4 billion in debt. Negative outlooks and ratings on CreditWatch negative are good leading indicators of actual downgrades. Relative to all speculative-grade-rated entities, weakest links account for a large proportion of defaults, particularly during periods of economic stress. During the 2001 to 2002 downturn, more than half of the weakest links defaulted within 12 months, and nearly 65% defaulted within three years. By contrast, about 10% of all speculative-grade-rated entities defaulted within 12 months and about 23% defaulted within three years. In the current default cycle, the trailing-36-month weakest links default rate continued to climb, reaching 58% in March 2011, while the 12-month weakest links default rate has already declined significantly to 18% from a high of 43% in September 2009. In any given one- or three-year period since 1999, the proportion of weakest-link defaulters was always higher than the proportion of defaulters from the entire speculative-grade pool. For the trailing 36 months, the weakest links default rate was, on average, 2.2x higher than for all speculative-grade-rated issuers from 1999 to 2011 and was 6.4x higher than the speculative-grade default rate at the end of 2007. (For more details, see "Most Of The Global Defaulters In 2011 Were Weakest Links," published Jan. 20, 2012.)

The number of weakest links has declined significantly from the record high of 300 in April 2009, when the credit markets were much more volatile. The weakest links are the lowest-rated entities, so it is no surprise that many of the companies that have defaulted were weakest links. In the 2001 recession, the sharp rise in defaults accompanied the rise in weakest links. More recently, for publicly rated companies, weakest links represented 97 of the 105 defaulted companies in 2008, 218 of the 236 defaulted companies in 2009, 59 of the 70 defaulted companies in 2010, and 41 of the 53 defaulted companies in 2011. In 2012, 13 of the 14 (excluding confidential entities) defaulted entities were our prior weakest links.

Since our most recent report, we removed 14 entities from our list of weakest links and added six others. Eleven of the 14 entities that we removed from the list were U.S. entities, with the remaining entities from Europe and Asia Pacific. We removed the following entities from the list:

• AmerCable Inc. after we revised the CreditWatch implications to positive from negative;
• Circus and Eldorado Joint Venture after Standard & Poor's revised the Credit Watch implications to developing from negative;
• Spanish Broadcasting System Inc., CityCenter Holdings LLC, and Phibro Animal Health Corp. after Standard & Poor's revised the outlooks to stable;
• Global Aviation Holdings Inc., PT Berlian Laju Tanker Tbk., Reichhold Industries Inc., DirectBuy Holdings Inc., Petroplus Holdings AG, and Republic Mortgage Insurance Co. after the companies defaulted; and
• Wastequip Inc. and Chaoda Modern Agriculture (Holdings) Ltd. when their ratings were withdrawn.

We added the following entities to the weakest link list:

• PaperWorks Industries Holding Corp. after Standard & Poor's downgraded the entity to 'B-' and placed it on CreditWatch negative;
• Tembec Inc., after Standard & Poor's assigned it a negative outlook;
• Yellow Media Inc. after Standard & Poor's downgraded it to 'B-';
• IAP Worldwide Services Inc. after Standard & Poor's downgraded the company to 'CCC+' from 'B';
• Springleaf Finance Corp. after Standard & Poor's downgraded the company to 'CCC'; and
• Yell Group PLC after Standard & Poor's assigned it a 'B-' rating as a newly rated entity after selective default.

Of the six new weakest links, three are from the U.S. region, two are from Canada, and one is from Europe.

Based on the number of weakest links, we believe that the media and entertainment, banks, forest products and building materials, and consumer products sectors are most vulnerable to default (see chart 3). The media and entertainment sector has the greatest number of weakest links, with 30 entities, or 24.4% of the total. The bank sector has 12 weakest links, followed by the forest products and building materials sector, which has 10 entities.

Chart 3

U.S.-based issuers (a category in which we include issuers in tax havens such as Bermuda and the Cayman Islands) account for 62% of the 123 weakest links (see table 4). This preponderance is partially due to the fact that a large proportion of issuers Standard & Poor's rates are in the U.S. By volume, the 76 U.S.-based weakest links account for about $133.9 billion of debt, which is 64.9% of the total $206.4 billion for all of the weakest links.

Table 4

U.S. Speculative-Grade Default Forecast

Our baseline forecast (with a 60% probability) is for a 12-month-forward (December 2012) corporate speculative-grade default rate of 3.3% in the U.S. (see chart 4). To realize the mean baseline projection, a total of 51 speculative-grade-rated issuers would need to default in the next 12 months. This implies an average of about 4.25 defaults per month, higher than the average of about 2.4 defaults per month in the last 12 months.

Chart 4

Standard & Poor's expects the U.S. corporate trailing 12-month speculative-grade default rate to rise to 3.3% by December 2012 from 1.98% as of December 2011. Our baseline projection is still lower than the long-term (1981-2011) average of 4.5%. A total of 51 issuers would need to default in the 12 months ending December 2012 to reach this projection. Five U.S. speculative-grade companies defaulted as of Jan. 31, 2012, bringing the default rate up to an estimated 2.4%. In 2011, 29 speculative-grade issuers defaulted during the 12 months ended December 2011--12 of which defaulted in the fourth quarter.

In addition to our baseline projection, we forecast the default rate in our optimistic and pessimistic scenarios. Our optimistic default rate forecast assumes that the U.S. economy and financial markets perform better than expected. As a result, we would anticipate the default rate to be just below the current level at 1.8% by December 2012 (or 28 defaults during the 12-month period). On the other hand, a financial collapse and a deep recession in Europe could lead to another recession in the U.S. Under this pessimistic scenario, we would expect the default rate to be 5.3% (or 81 defaults during the 12-month period). We base our forecasts on quantitative and qualitative factors, including, but not limited to, Standard & Poor's proprietary default model for the U.S. corporate speculative-grade bond market. We update our outlook for the U.S. issuer-based corporate speculative-grade default rate each quarter after analyzing the latest economic data and expectations.

The increased momentum of the U.S. economic recovery has reduced the risk of another recession. The labor market is improving, businesses appear to have more confidence, which has lead to greater investment and increased hiring, and consumers are spending a little bit more. However, as we learned last year, this stronger showing of the economy as of late may not be a reliable indicator of a strong economy for the remainder of the year. Strong headwinds remain and volatility continues to characterize the recovery. While the risk of another recession has been reduced, it could still occur, predominantly due to Europe's unresolved financial issues. Moreover, the markets remain concerned about increased regulation in the U.S., the still excessive housing supply, and the government's austerity measures, which may impede the recovery (see "Default, Transition, and Recovery: The U.S. Corporate Default Rate Is Forecasted To Rise To 3.3% In 2012," published Feb. 2, 2012).

Macroeconomic Sources Of Default Rates

The U.S. speculative-grade spread started increasing at the beginning of August because of the growing uncertainty in the global financial markets and peaked at 830 bps on Oct. 4. The spread declined through October, but increased gradually in November to finish the month at 740 bps and again started falling through January. On Feb. 14, the U.S. speculative-grade spread was 656 bps, compared with 465 bps a year ago. The U.S. corporate investment-grade spread declined to 207 bps as of Feb. 14 from 216 bps as of Jan. 31, 2012, compared with 163 bps as of Feb. 14, 2011. Bond spreads naturally correlate with Standard & Poor's U.S. distress ratio, and the distress ratio typically reflects the movements in spreads (see table 5). As of Jan. 18, 2012, 15.3% of all U.S. corporate speculative-grade issues were trading at distressed levels (see chart 5). The distress ratio was 16.6% in December, 15.7% in November, and an all-time high of 85% in December 2008.

Table 5

Chart 5

A rising distress ratio reflects an increased need for capital and is typically a precursor to more defaults if accompanied by severe and sustained market disruption. Currently, the variability in the distress ratio, along with various other economic, financial, and credit variables, indicates a mixed outlook for the default rate.

Although, in aggregate, the movement of Standard & Poor's distress ratio is roughly parallel to the movement of the speculative-grade default rate (with a lead time of eight to nine months), the distress ratio displays more variation when broken down by industry. The leading sectors of distress as of Feb. 15 were diversified and transportation, which had distress ratios of 50% and 26.5%, respectively. However, when combined, these sectors had only 10 distressed issues. The media and entertainment sector came in third, with a distress ratio of 22.6%, and aerospace and defense followed with a distress ratio of 17.9%.

Ten sectors have experienced an increase in their proportions of total distressed issuers since January, while nine sectors have experienced a decrease. The sector with the largest decrease in its proportion of the total was chemicals, packaging, and environmental services, which fell by 3.1% month over month to 2%. Following closely behind was the high technology sector, which had its proportion of total distressed issues decline by 3% from last month (see "Credit Trends: Distressed Debt Monitor: The U.S. Distress Ratio Falls To 13.2% In February," published Feb. 23, 2012).

The U.S. economy grew at an annualized rate of 2.8% in the fourth quarter, as per the advance estimate. In the third quarter, real GDP grew by 1.8%. Our economists expect real GDP in the U.S. to grow 2.1% in 2012 and no growth in the eurozone. Industrial production increased 0.4% in December, after having plunged 0.3% in November.

The unemployment rate declined by 0.2 percentage points in January to 8.3% from 8.5% a month ago (see chart 6). The unemployment rate historically is a lagging indicator, and we expect that it will remain elevated in the coming quarters. According to the Bureau of Labor Statistics, nonfarm payroll employment increased by 243,000 in January, after the data for December and November were upwardly revised to 203,000 and 157,000, respectively (previously, there were 200,000 additions in December and 100,000 additions in November). We anticipate that the labor market will remain weak, and we forecast an unemployment rate of 8.4% for 2012 (see "U.S. Economic Forecast: Recovery Warms Up In January," published Feb. 10, 2012).

Chart 6

The U.S. manufacturing sector expanded for the 30th consecutive month in January, according to the Institute for Supply Management (ISM). ISM's manufacturing index rose to 54.1 points in January from 53.1 points in December. However, the reading is lower than the 12-month-high of 59.9 points. Nonetheless, the index has remained above the 50-point threshold, which indicates unchanged activity. The new order index increased by 2.8 points to 57.6 points in January, and the delivery index increased 2.1 points to 53.6. However, the production index declined by 3.2 points to 55.7. The exports expanded by 2.0 points, and imports plunged by 1.5 points. (For more details, see "A Diverging And Volatile World Economy Will Influence Growth For The Gulf In 2012," published Jan. 23, 2012.)

Results from the Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices in January 2012 indicate domestic banks have made little change in their lending standards. They have experienced stronger loan demand, on net, in the past three months for commercial and industrial (C&I) loans, particularly for large and midmarket firms (firms with annual sales of $50 million or more). According to the survey, the domestic banks continued to ease pricing terms on C&I loans in the fourth quarter of 2011 because of a rise in demand from all size of firms. However, the foreign respondents have tightened both lending standards and terms on C&I loans, on net, as they have witnessed unchanged loan demand in the past three months. Domestic banks continued to experience little change in their standards for CRE loans. However, modest net fractions have eased some loan terms over the past year. For large and midsize firms, a net 5.4% of banks reported easing lending standards in the January 2012 survey (see table 6 and chart 7). For small firms, a net 1.9% of banks reported easing lending standards in January, compared with a net 6.2% in July. According to the survey, for domestic banks, stronger demand for C&I loans outnumbered reports of weaker demand, in contrast to the net weakening of loan demand seen in the previous survey.

Table 6

Chart 7

Eurozone GDP contracted 0.3% in the fourth quarter, following growth of just 0.2% in the third quarter of 2011. The eurozone unemployment rate remained unchanged from the previous month in December at 10.4%. Eurozone industrial production plunged 1.1% in December, after being flat the previous month (see chart 8). The eurozone purchasing managers' index for the manufacturing sector reached a five-month high, increasing by 1.9 percentage points to 48.8 in January from 46.9 points in December, showing improvement in economic activities amid looming the debt crisis and recession in the region. Our economists expect a mild recession in the eurozone in the first half of 2012, followed by a modest pickup in the second half of the year.

Chart 8

Results from the January 2012 European Central Bank's Euro Area Bank Lending Survey indicated a substantial rise in net tightening of credit standards from the previous quarter. The surveyed banks reported that lending standards for loans to small, medium, and large enterprises tightened significantly. In the fourth quarter of 2011, banks reported a net 5% decline in demand for loans from enterprises, compared with an 8% decline in demand in the previous quarter. The fall of loan demand is a result of an uncertain economic outlook and the sovereign debt crisis in the region. Also, a lack of financing, which is linked to inventories and working capital, contributes to the deteriorating loan demand in the region.

Table 7

Monitoring The Pipeline Of Low-Rated Issuance Activity

In February (through Feb. 17, 2012), a total of 104 deals (worth $49.9 billion) came to market globally. In comparison, during 2011, a total of 639 (worth $302.2 billion) new speculative-grade deals came to market, versus 755 deals (worth $345.3 billion) in 2010. New speculative-grade issuance totaled $203 billion in 2009 and $56 billion in 2008. In the U.S., 26 new speculative-grade deals came to market in February 2012 (through Feb. 17), following 32 deals in January 2012 and 10 deals in December 2011. The dollar volume of new issuance was $14 billion in February (through Feb. 17) and $14.3 billion in the January 2012. During 2011, a total of 402 (worth $185.3 billion) new speculative-grade issuance came to the market. By comparison, there were 307 new speculative-grade deals (worth $134.3 billion) in the first half of 2011 and 95 (worth $51 billion) in the second half of 2011. Overall, 511 new U.S. speculative-grade deals came to market in 2010, accounting for $223 billion in debt, compared with only 313 (worth $132 billion) in 2009 and 104 (worth $39 billion) in 2008. New issues Standard & Poor's rates 'B-' or lower in the trailing six months as a proportion of total speculative-grade issuance were 18.5% in January, down from 27.7% in December (see chart 9). In February (through Feb. 17, 2012), 29.6% of the new speculative-grade deals that came to market were rated 'B-' or lower. On an annual basis, this ratio was 34.8% in 2011, 28.4% in 2010, 21.4% in 2009, and 17.3% in 2008.

Chart 9

In Europe, speculative-grade issuance activity has risen after remaining extremely low in the last quarter of 2011. There were seven speculative-grade deals in the last quarter of 2011 but 33 deals in the first two months of 2012 (through Feb. 17), 15 in January, and 18 in February. By comparison, there were 98 new deals (worth $51.6 billion) in the first half of 2011 and just 15 (worth $7.6 billion) in the second half of 2011.

We closely monitor issues Standard & Poor's rates 'B-' and lower because these demonstrate, in our view, investors' appetite (or lack thereof) for absorbing riskier assets. Entities rated at this end of the spectrum are usually more prone to defaulting and are often the first to lose access to financing when market liquidity recedes. Low-rated issuance from 2003-2007 has been a source of defaults in recent quarters. We expect this pool of issuers to potentially experience more defaults in 2012. Over the long term (1981-2011), an average of 8.64% of all global entities Standard & Poor's rates 'B-' defaulted within 12 months, and the average default rate was much higher for entities rated lower than 'B-' (see table 8). The average 12-month transition to default declines as we move higher on the rating scale (for example, 2.5% for entities rated 'B+', 1.23% for entities rated 'BB-'). The previous spike in issuance at these speculative-grade rating categories from 1997-1999 led to an increase in defaults in 2001 (see chart 9). During this period, the share of speculative-grade-rated companies with issues rated 'B-' or lower consistently exceeded 30%. The increase of issues rated 'B-' and lower from 2003-2007 was an early warning of the credit deterioration and default risk in 2008 and 2009.

Table 8

Table 9