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Global Weakest Links And Default Rates: Weakest Links Are Unchanged And Default Rates Increase Slightly In April

Publication date: 26-May-2011 17:46:44 GMT

The number of global weakest links held steady at 105 as of May 19, 2011, the same as the previous month, but a decrease from 108 in March 2011. Weakest links are issuers rated 'B-' and lower with a negative outlook or ratings on CreditWatch negative. The 105 weakest links have total rated debt worth $140 billion.

So far in 2011 (through May 19), 13 issuers have defaulted, with combined outstanding debt worth $36.6 billion. In 2010, 82 issuers defaulted on debt worth $97.48 billion. In 2009, 264 issuers defaulted, affecting debt worth $627.7 billion, and in 2008, 126 issuers defaulted, affecting debt worth $433 billion. Highlights from this month's report are:

  • The 12-month-trailing global corporate speculative-grade default rate increased to 2.28% in April from 2.07% in March. Regionally, the U.S. speculative-grade corporate default rate increased modestly, to 2.55% in April from 2.47% in March. In Europe, the default rate fell to 0.95% from 0.98%, and the emerging markets default rate increased to 1.2% from 1.05%.
  • Global corporate speculative-grade issuance remains strong in 2011, totaling $149.5 billion through April 30. New issuance reached a record-high $345 billion in 2010, following $203 billion in 2009 and only $56 billion in 2008.
  • Companies rated 'B-' and lower have a notable amount of debt coming due over the next four years. In the U.S., approximately $250 billion in debt rated 'B-' and lower will mature between 2011 and 2015. (For more details, see "U.S. Refinancing Study: Maturities Should Be Manageable Over Next Five Years, Except For 'B' Rated Issuers In 2013-2014," published Oct. 27, 2010.)
  • The U.S. speculative-grade spread was 492 basis points (bps) as of May 17, 2011, 482 bps at the end of April, and 478 bps at the end of March.
  • The U.S. has the most weakest links, with 71 of the 105 entities (67.6%). By sector, media and entertainment; oil and gas exploration and production; chemicals, packaging, and environmental services; and consumer products had the highest concentrations of weakest links.
  • Our baseline projection for the U.S. corporate speculative-grade default rate in the 12 months ending in March 2012 is 1.6%. A total of 24 speculative-grade-rated issuers would need to default from April 2011 to March 2012 to realize the mean baseline projection. This would be an average of two defaults per month--more than the average of about 1.5 defaults per month in the first quarter of 2011, but less than the average of about four per month in 2010 and 13 to 14 average per month in 2009. (For more details, see "U.S. Corporate Default Rate Expected To Decline To 1.6% By March 2012," published April 20, 2011.)
  • Our alternative default rate forecasts are 3.3% for the pessimistic scenario and 1.2% for the optimistic scenario. From April 2011 to March 2012, 50 issuers would have to default to reach the pessimistic default rate forecast, and 18 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) continued to decline to 1.50% in April from 1.62% in March, 2.05% in February, and 2.18% in January, according to Standard & Poor's Leveraged Commentary & Data (LCD).

Monthly Movements In Default Rates

Globally, the 12-month-trailing corporate speculative-grade default rate increased to 2.28% in April from 2.07% in March. In the U.S., the corporate speculative-grade default rate rose to 2.55% from 2.47%. The European speculative-grade default rate fell to 0.95% from 0.98%, and the emerging markets default rate increased to 1.2% from 1.05%.

Table 1

Default Rates (%)
Global U.S.* Europe¶ Emerging markets
12-month rolling§
Investment grade 0.00 0.00 0.00 0.00
Speculative grade 2.28 2.55 0.95 1.2
All rated 0.95 1.27 0.18 0.65
2010
Investment grade 0.00 0.00 0.00 0.00
Speculative grade 2.81 3.28 1.02 1.23
All rated 1.14 1.61 0.18 0.66
2009
Investment grade 0.32 0.34 0.11 0.59
Speculative grade 9.46 11.12 8.06 6.09
All rated 4.04 5.68 1.41 3.54
2008
Investment grade 0.41 0.73 0.11 0.22
Speculative grade 3.55 4.11 2.66 2.17
All rated 1.74 2.46 0.54 1.33
2007
Investment grade 0.00 0.00 0.00 0.00
Speculative grade 0.89 1.00 1.03 0.18
All rated 0.37 0.49 0.18 0.11
*U.S. default rate includes issuers incorporated in U.S. tax havens (e.g., Bermuda and the Cayman Islands). ¶Europe refers to Austria, Belgium, Bulgaria, Channel Islands, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, and the U.K. §Data through April 30, 2011. Subject to revision. Source: Standard & Poor's CreditPro®.

Chart 1

The widespread decline in default rates from six and 12 months ago reflects the significant improvement in the credit markets. Nonetheless, the consumer/service, leisure time/media, and real estate sectors still have higher default rates than other sectors (see table 2). In our view, this is not surprising, given the cyclicality of the consumer and leisure time/media sectors and their dependence on strong consumer spending, as well as the continued stress in the U.S. residential and commercial real estate markets.

Table 2

Trailing 12-Month Corporate Default Rates By Industry (U.S. Speculative-Grade Issuers Only*)
Subsector 4/30/2011 3/31/2011 Six months ago 12 months ago
Financial
Financial institutions 4.76 4.84 3.33 9.84
Insurance 1.89 1.92 1.96 0.00
Nonfinancial
Aerospace/automotive/capital goods/metal 1.63 1.69 2.81 13.13
Consumer/service sector 4.88 3.72 3.25 3.63
Energy and natural resources 2.27 1.57 4.20 6.90
Forest and building products/homebuilders 1.64 3.33 8.20 25.00
Health care/chemicals 1.06 1.09 1.63 4.76
High technology/computers/office equipment 0.00 0.00 0.00 0.88
Leisure time/media 4.62 5.15 6.99 15.92
Real estate 4.00 4.55 5.56 13.04
Telecommunications 1.56 1.64 1.54 3.17
Transportation 0.00 0.00 4.17 13.64
Utility 0.00 0.00 0.00 0.00
*U.S. default rate includes issuers incorporated in U.S. tax havens (e.g., Bermuda and the Cayman Islands). Data as of April 30, 2011. Sources: Standard & Poor's Global Fixed Income Research and Standard & Poor's CreditPro®.

As of May 19, 2011, global corporate defaults totaled 13 in 2011, accounting for $36.60 billion in debt. In 2010, 82 issuers defaulted, affecting debt worth $97.48 billion. In 2009, 264 issuers defaulted, affecting debt worth $627.7 billion, and in 2008, 126 entities defaulted, accounting for $432 billion in debt. The annual global tally of defaults in 2007 was 22 on debt worth $8.1 billion, 30 in 2006 on debt worth $7.13 billion, and 39 in 2005 on debt worth $42 billion. Below are the details of the entities that defaulted since our most recent weakest links report.

  • On April 19, 2011, Standard & Poor's Ratings Services revised its counterparty credit rating on Russia-based bank Sotsgorbank to 'D' from 'CCC'. The rating action followed the Central Bank of Russia's revocation of Sotsgorbank's banking license on April 18, 2011, and its introduction of a temporary management team at Sotsgorbank.
  • On April 20, 2011, Standard & Poor's revised its corporate credit rating on U.S.-based oil and gas company Texas Competitive Electric Holdings Co. LLC (TCEH) to 'SD' from 'CC'. We took the rating action after the company obtained lender consent to amend its senior secured credit facilities and to extend the maturities of a portion of them. Later, Standard & Poor's Ratings Services raised its corporate credit ratings to 'CCC' following the completion of an amendment to extend the maturities on TCEH's senior secured credit facilities.
  • On April 29, 2011, Standard & Poor's revised its corporate credit rating on U.S.-based retail company Keystone Automotive Operations Inc. to 'SD' from 'CC'. The rating action followed Keystone's completion of its exchange offer.
  • On May 6, 2011, Standard & Poor's revised its corporate credit rating on U.S.-based media and entertainment company Caribe Media Inc. to 'D' from 'CCC-'. The downgrade followed the announcement that Caribe Media and certain of its affiliates filed voluntary bankruptcy petitions to reorganize under the provisions of Chapter 11 of the U.S. Bankruptcy Code in the District of Delaware.
  • On March 7, 2011, Standard & Poor's revised its corporate credit rating on Medford, Ore.-based Harry & David Operations Corp. to 'D' from 'CC'. We took the rating action after Harry & David missed interest payments due March 1, 2011, on its $70 million senior floating-rate notes and $175 million senior fixed-rate notes.

Table 3

2011 Defaulters*
Company name Country Industry Debt amount (mil. $) Default date
SAZKA a.s. Czech Republic Leisure time/media 203.00 1/13/2011
Sbarro Inc. U.S. Consumer/service sector 347.88 2/1/2011
Ahern Rentals Inc. U.S. Aerospace/automotive/capital goods/metal 617.46 2/16/2011
Harry & David Operations Corp. (Unsolicited Ratings) U.S. Consumer/service sector 303.36 3/7/2011
Western Pacific Insurance Ltd. New Zealand Insurance 0.00 4/4/2011
Geneva Finance Ltd. New Zealand Financial institutions 30.00 4/5/2011
Perkins & Marie Callender's Inc. U.S. Consumer/service sector 344.21 4/7/2011
Liz Claiborne Inc. U.S. Consumer/service sector 759.71 4/11/2011
Cinram International Inc. Canada Leisure time/media 936.00 4/12/2011
SOTSGORBANK Russia Financial institutions 0.00 4/19/2011
Texas Competitive Electric Holdings Co. LLC (Energy Future Holdings Corp.) U.S. Utility 32,460.29 4/20/2011
Keystone Automotive Operations Inc. U.S. Aerospace/automotive/capital goods/metal 445.60 4/28/2011
Caribe Media Inc U.S. Leisure time/media 155.00 5/6/2011
Total 36,602.51
*Excludes confidential entities. Data as of May 19, 2011. Source: Standard & Poor's CreditPro®.

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) decreased to 1.50% in April from 1.62% in March, 2.05% in February, and 2.18% in January. The leveraged loan default rate has declined significantly since 2009 as credit markets have stabilized and economic activity has picked up. The loan distress ratio (defined as the percentage of loans trading below 80 cents on the dollar) decreased to 3.92% in April from 4.40% in March and 4.36% in February, but it remains markedly lower than levels seen in early 2010 and 2009.

Chart 2

This Month's Weakest Links

The number of global weakest links held steady at 105 as of May 19, 2011, the same as the previous month but significantly lower than 161 a year ago. Many weakest links have already defaulted, and we expect a large proportion of the defaults in the next few quarters to stem from this group. The 105 weakest links account for a total of $140 billion in debt. Negative outlooks and CreditWatch listings serve as good leading indicators of actual downgrades. The one-year default rate for weakest links was, on average, 7.2x higher than for all issuers rated speculative grade from 1999 to 2010 and was 14.3x higher in 2007, when the corporate speculative-grade default rate was near historical lows. In the trailing 36 months, the weakest links default rate was, on average, 3.8x higher than for all issuers rated speculative grade from 1999 to 2010 and was 7.6x higher than the speculative-grade default rate toward the end of 2007. Of the 228 weakest links at the beginning of 2010, 40 entities defaulted by year-end and 66 remained weakest links (for more details, see "Global Weakest Links, Halved In 2010, Still Accounted For Most Defaults," published Jan. 13, 2011).

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. 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 recessions that started in 2001 and 2007, the sharp rise in defaults accompanied the rise in weakest links. In 2008, 97 of the 105 publicly rated companies that defaulted were weakest links, and in 2009, 218 of the 236 publicly rated companies that defaulted were weakest links. In 2010, 59 of the 70 publicly rated companies that defaulted were weakest links, and in 2011, 11 of the 13 defaulters were weakest links.

Since our most recent report, we have removed 12 entities from our list of weakest links and have added 12 others. We removed Keystone Automotive Operations Inc., Sotsgorbank, and Caribe Media Inc. because they defaulted, and we took CRC Health Corp., ATP Oil & Gas Corp., Heckler & Koch GmbH, and RLC Industries Co. (ratings subsequently withdrawn) off the list because of revisions to their CreditWatch/outlook status. We removed PT Sulfindo Adiusaha and PT Energi Mega Persada Tbk. from the list because they were downgraded and now have developing outlooks. Penton Business Media Holdings Inc. and CheckSmart Financial Co. came off the list after Standard & Poor's raised its ratings on the companies and assigned stable outlooks. Finally, we took Gold Toe Moretz Holdings Corp. off the list because it's no longer rated by Standard & Poor's.

Of the 12 new weakest links, we added China Forestry Holdings Co. Ltd. after it was downgraded and assigned a negative outlook. We added Shearer's Foods Inc. because the ratings on the company are now on CreditWatch negative. We added Reichhold Industries Inc., AMR Corp., Smart & Final Holdings Corp., and PT Davomas Abadi Tbk. because the outlooks on the companies were revised to negative. GFNZ Group Ltd. and Milagro Oil & Gas Inc. are newly rated entities that meet our criteria, and El Pollo Loco Inc., Brookstone Inc., MGIC Investment Corp., and Dune Energy Inc. are now on the list following revisions to the database. Of the 12 new weakest links, nine are based in the U.S.

Based on the number of weakest links, the media and entertainment; oil and gas exploration and production; and chemicals, packaging, and environmental services sectors are most vulnerable to defaults (see chart 3). The media and entertainment sector has the most weakest links, at 24, or 22.9% of the total. Oil and gas exploration and production had 12 entities, and chemicals, packaging, and environmental services had eight. Entities in these sectors are, in our opinion, particularly vulnerable to the risks lingering in the global economy. The media and entertainment sector continues to suffer from lackluster advertising budgets, while oil and gas exploration and production is particularly exposed to the uncertainty in the Middle East. Moreover, many companies in these sectors experienced some of the highest volumes of leveraged activity in recent years, as increased domestic and global competition compelled them to adopt more aggressive financial policies.

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 67.6% of weakest links. This preponderance is partially a result of the fact that a large proportion of Standard & Poor's rated issuers are in the U.S. By volume, the 71 U.S.-based weakest links account for $105.84 billion of debt, which is 67.6% of the total $140 billion issued by all weakest links.

Table 4

Geographical Distribution Of Weakest-Rated Issuers
Region Total Distribution (%)
U.S. 71 67.6
Europe 11 10.5
Latin America 7 6.7
Asia-Pacific 7 6.7
Eastern Europe/Middle East/Africa 5 4.8
Canada 4 3.8
Data as of May 19, 2011. Source: Standard & Poor's Global Fixed Income Research.

U.S. Speculative-Grade Default Forecast

Our baseline forecast (with a 60% probability) is for a 12-month-forward (March 2012) corporate speculative-grade default rate of 1.6% in the U.S. (see chart 4). To realize the mean baseline projection, a total of 24 speculative-grade-rated issuers would need to default in the next 12 months. This implies an average of two defaults per month, less than the average of about four per month in 2010, but a little more than the monthly average of about 1.5 defaults in the first quarter of 2011. (For more details, refer to "U.S. Corporate Default Rate Expected To Decline To 1.6% By March 2012," published April 20, 2011.)

Chart 4

The economic assumptions of our baseline projection indicate that the pace of recovery in 2011 should be about the same as in 2010. Consumers are spending but remain guarded. As a result of modest consumer spending, the savings rate is higher. The improvement in employment conditions is helping boost confidence, though higher oil prices are offsetting this by cutting into purchasing power. Housing remains the weakness of the economy, and housing prices are only slightly above the April 2009 trough. We expect Fed purchases to end in June, but we don't expect a Fed rate hike until year-end, even though the European Central Bank raised its refinancing rate by 25 bps early in April. Problems in parts of Europe and the Middle East remain a threat to the U.S. economic recovery. The danger of a second downturn has increased, but absent any material worsening in Europe and the Middle East, we still expect the U.S. economy to avoid returning to a recession. We expect economic growth of 2.9% in 2011 and growth of 2.6% in 2012. (For more details, refer to "U.S. Economic Forecast: Economic Shutdown?," published April 8, 2011.)

In a less-likely pessimistic scenario, the economy slips back into a recession in the second half of 2011 through the first half of 2012. Concerns about the trillion-dollar deficit increase and extensions of the tax cuts implemented at the beginning of the millennium could push interest rates higher. Oil prices could surge to more than $150/barrel as the turmoil in Libya spreads across the region. Housing prices could weaken further, falling another 15% from current levels. Equity markets drop back to the lows reached in March 2009. Spending would retreat as consumers try to rebuild the wealth they lost from falling home and asset values. The unemployment rate could climb back into the double digits and remain there throughout 2012. Real GDP would contract another 1.2% on top of the 4.1% decline in the first dip. The succeeding recovery would be slow. (For more details, see "U.S. Risks To The Forecast: Oil We Have To Fear Is ?," published March 15, 2011.) Under such a scenario, we expect the default rate to rise back to 3.3% by March 2012. A total of 50 issuers would need to default from April 2011 to March 2012 to realize the pessimistic scenario.

Conversely, a relatively optimistic scenario suggests a default rate of 1.2%, just above the 25-year low of 1% reached in December 2007. A total of 18 issuers would need to default to realize this projection, or about 1.5 defaults per month in the next 12 months. An improving housing market, greater confidence, better job market conditions, and stronger growth abroad would help reduce the strains on the U.S. economy. Gains in productivity would keep inflation in check despite stronger economic growth. Consumer spending could expand faster than expected, buoyed by stronger employment. The low mortgage rates would help the housing sector rebound faster. Capital spending could improve, but still tight lending conditions could cap the upside potential. Unemployment could decline further--to less than 8%--by the end of 2011 and to less than 7% by the end of 2012. The result would be real GDP growth of about 4% in 2011 and 2012.

We determine our forecast based on a variety of factors, including (but not limited to) Standard & Poor's proprietary default model for the U.S. corporate speculative-grade bond market. The main components of the model include economic variables such as the unemployment rate; financial variables such as corporate profits, the Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices, the interest burden, and the slope of the yield curve; and credit-related variables such as negative bias. The interaction between the dependent variable (the U.S. speculative-grade default rate) and the input variables is in line with expectations. For instance, increases in the unemployment rate and negative bias are positively correlated with the speculative-grade default rate, which means that as unemployment rates increase or as the proportion of entities with negative outlooks or ratings on CreditWatch negative rises, default rates usually accelerate.

Table 5

Historical Default Cycle Characteristics
--Length-- --Default rate (%)-- --Default rate change (%)--
Trough Peak Length (years) At trough At peak Trough to peak 12 months after trough
5/31/1989 7/31/1991 2.2 2.64 12.54 9.90 3.81
3/31/1995 3/31/1996 1.0 1.68 4.06 2.38 2.38
4/30/1997 4/30/2002 5.0 1.31 10.82 9.51 1.71
12/31/2007 11/30/2009 1.9 1.00 11.42 10.42 3.09
Average 2.5 1.7 9.7 8.05 2.75
Source: Standard & Poor's Global Fixed Income.

Macroeconomic Drivers Of Default Rates

The U.S. corporate speculative-grade spread was 492 bps as of May 17, 2011, about the same as 482 bps at the end of April, but significantly lower than 615 bps a year ago. The U.S. corporate investment-grade spread was less volatile. It was 162 bps as of May 17, 2011, largely unchanged from the end of April and slightly lower than 180 bps a year ago.

Bond spreads naturally correlate with Standard & Poor's U.S. distress ratio, and movements in spreads are usually reflected in the distress ratio as well. As of April 15, 2011, 3.56% of all U.S. corporate speculative-grade issues were trading at distressed levels (see chart 5). The distress ratio was 5.24% a month earlier and was at an all-time high of 85% in December 2008. (For more details, see "U.S. Distressed Debt Monitor (Premium)," published April 26, 2011.) A rising distress ratio generally signals an increased need for capital, and it could be a precursor to more defaults, especially if it's accompanied by a market disruption. Nine sectors have experienced an increase in their percentage of the total distressed universe from the previous month, while six sectors have experienced a decrease. Some sectors saw large changes in their proportions of the distress market from last month. Retail/restaurants increased by 3%; chemicals, packaging, and environmental services increased by 2.8%; and oil and gas fell by 5%. In an unusual turn of events, consumer products--which is generally a leading sector of distress--posted a distress ratio of zero for the past two consecutive months. When measured by the total number of distressed issues outstanding, the media and entertainment sector remains the largest sector in the distressed market, accounting for 21.8% of this month's total distressed issue count. Conversely, this sector accounts for about 20% of the affected debt. By number of issues, the retail/restaurants and oil and gas sectors account for 18.2% and 12.7% of this month's distressed issues, respectively. Because retail/restaurants accounts for a larger proportion of the distressed market by issue count than it does by total affected debt, its average distressed issue size is smaller than that for the oil and gas sector, in which the opposite is true. Oil and gas accounts for 12.7% of the total distressed issues and 25.2% of the total affected debt.

Chart 5

U.S. GDP grew 1.8% in first-quarter 2011, following 3.1% growth in the fourth quarter. The unemployment rate remains elevated at 9% in April, compared with 8.8% in March and 9.8% in April 2010 (see chart 6). The unemployment rate historically is a lagging indicator, and we expect the labor market to improve slowly throughout the year. Payroll employment rose by 244,000 in April--the seventh consecutive monthly increase--following an increase of 221,000 in March, 235,000 in February, and 68,000 in January. Nonetheless, gains in employment are modest compared with the 8.4 million jobs lost in 2008 and 2009, but these improvements should eventually lower the unemployment rate and help spur the economic recovery.

Chart 6

The manufacturing sector expanded for the 21st consecutive month in April, according to the Institute for Supply Management (ISM). The manufacturing index remained above 60 for the fourth consecutive month, at 60.4 in April, 61.2 in March, 61.4 in February, and 60.8 in January. Readings above the 50 threshold indicate unchanged activity. Production and new orders were strong in April at 63.8 and 61.7, respectively. This led to a good employment reading, at 62.7--the fourth month in a row that the score exceeded 60. The exports index was 62 in April, a sharp increase from 56 in March. Prices remain high at 85.5, and vendor performance (supplier deliveries) was at 60.2 in April.

Results from the Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices in April 2011 indicate that banks continued to ease lending standards and terms for commercial and industrial (C&I) loans and that demand for C&I loans and commercial mortgages generally increased. However, the demand for residential mortgages continued to decline. The domestic banks surveyed reported net easing of standards and terms on C&I loans as a result of a more favorable and less uncertain economic outlook and increased competition from other banks or nonbank lenders. Favorable standards and terms are welcome news to firms that are seeking to secure financing. For large- and medium-size firms, 16.4% of banks reported loosening lending standards in the April 2011 survey (more in the January survey) (see table 6 and chart 7). For small firms, 13.5% of banks reported loosening lending standards in April, higher than 1.9% in January.

Table 6

The Fed's Senior Loan Officer Opinion Survey: April 2011
Net % of domestic banks reporting: Apr-11 Jan-11 Oct-10 Jul-10 Apr-10 Jan-10 Oct-09 Jul-09 Apr-09 Jan-09 Oct-08 Jul-08
Tightening standards
Large and medium firms (16.4) (10.5) (10.5) (8.8) (7.1) (5.5) 14.0 31.5 39.6 64.2 83.6 57.6
Small firms (13.5) (1.9) (7.1) (9.1) 0.0 3.7 16.1 34.0 42.3 69.2 74.5 65.3
Stronger demand
Large and medium firms 27.3 28.1 (7.0) 1.8 (7.1) (25.5) (31.6) (44.4) (60.4) (60.4) (16.7) (3.8)
Small firms 9.6 5.6 (21.4) (3.6) (9.3) (29.6) (35.7) (54.7) (63.5) (57.7) (7.4) (15.4)
Increasing spreads of loan rates over banks' cost of funds
Large and medium firms (54.5) (47.4) (33.3) (49.1) (7.1) 9.1 40.4 59.3 79.2 92.5 98.2 80.8
Small firms (50.0) (29.6) (21.4) (32.7) 9.3 14.8 42.9 64.2 75.0 88.5 92.7 71.1
Tightening standards for mortgages to individuals 0 0 0 0 0 0 0 0 0 0 0
More willingness to make consumer installment loans 28.8 20.4 20 22.6 14 9.6 (1.9) (6) (5.9) (16) (47.2) (34)
Demand for loans to households
Residential mortgages 0 0 0 0 0 0 0 0 0 0 0
Consumer installment 0.0 5.6 (5.6) (7.5) (17.3) (33.3) (24.5) (21.2) (17.6) (47.1) (48.1) (30.0)
Source: Board of Governors of the Federal Reserve System.

Chart 7

In Europe, overall eurozone GDP was up 0.8% in the first quarter of 2011, an improvement from the 0.3% increase in the third and fourth quarters of 2010. We expect real GDP to grow 1.9% in 2011 and 1.8% in 2012. We anticipate that the labor market will remain weak for a while, and we forecast an unemployment rate of 9.8% in 2011 and slightly lower at 9.5% in 2012. Industrial production grew for the 15th straight month in March 2011, following 20 months of contraction (see chart 8), and manufacturing activity continued to expand, with the Eurozone PMI reading at 57.7 in April, well above the 50 threshold that indicates unchanged activity.

Results from the April 2011 European Central Bank's Euro Area Bank Lending Survey indicated that banks overall slightly tightened lending standards, compared with a neutral reading in January 2011 (see table 7). The surveyed banks reported that lending standards for loans to small, medium, and large enterprises tightened modestly. Lending standards for short-term loans eased slightly, while standards for long-term loans tightened. The banks' responses to the survey primarily reflected their liquidity positions and access to market funding , as well as their risk perceptions and overall economic situation.

Chart 8

Table 7

Changes In Credit Standards Applied To Enterprises Over The Past Three Months
Euro Area Weighted Results For All Responding Banks
--Overall-- --Loans to SMEs-- --Loans to large enterprises-- --Short-term loans-- --Long-term loans--
(%) Jan-11 Apr-11 Jan-11 Apr-11 Jan-11 Apr-11 Jan-11 Apr-11 Jan-11 Apr-11
Tightened considerably 1 1 0 1 1 2 0 1 2 2
Tightened somewhat 4 7 6 5 6 9 4 3 5 8
Remained basically unchanged 91 89 91 92 86 84 89 90 88 85
Eased somewhat 5 4 4 3 7 5 7 6 6 6
Eased considerably 0 0 0 0 0 0 0 0 0 0
Total 100 100 100 100 100 100 100 100 100 100
Net percentage (tightened - eased) 0 4 2 3 0 6 (3) (2) 0 4
Number of banks responding 113 117 110 115 109 112 113 117 111 115
Data as of April 2011. Source: European Central Bank, Frankfurt am Main, Germany. This information has been transformed by Standard & Poor's and may be obtained freely on the European Central Bank Web site.

Monitoring The Pipeline Of Low-Rated Issuance Activity

In the first four months of 2011, global speculative-grade issuance totaled $149.5 billion. In April, 88 corporate speculative-grade deals came to market, raising $36.7 billion, following 246 deals that came to market in the first quarter of 2011 raising a total $112.9 billion. Global new issuance among corporate speculative-grade-rated entities remains strong following the record highs reached in 2010. New speculative-grade issuance totaled $345 billion in 2010, $203 billion in 2009, and $56 billion in 2008.

In the U.S., 40 new deals came to market in April, following 149 deals in the first quarter of 2011. The dollar volume of new issuance was $17.18 billion in April, compared with $25.43 billion in March 2011, $16.46 billion in February, and $22.6 billion in January. In comparison, 162 new speculative-grade deals worth $68.91 billion came to market in the fourth quarter of 2010, and 125 deals worth $61.6 billion in the third quarter. In all of 2010, new U.S. speculative-grade deals totaled 511, accounting for $223.27 billion in debt, compared with only 314 deals ($132.21 billion) in 2009 and 104 deals ($38.55 billion) in 2008.

Of the total U.S. new issuance in April, $6.97 billion (41%) was rated 'B-' or lower. New issues rated 'B-' or lower in the trailing six months as a proportion of total speculative-grade issuance decreased to 35.79% in April from 36.33% in March, 34.08% in February, and 30.82% in January (see chart 9). In first-quarter 2011, 36.24% of the new speculative-grade deals that came to market were rated 'B-' or lower, compared with 36.42% in the fourth quarter of 2010 and 20.8% in the third quarter. On an annual basis, this ratio was 28.38% in 2010, 21.41% in 2009, 17.31% in 2008, and 48.82% in 2007. Measured by dollar volume, the proportion of debt that issuers rated 'B-' and lower raised in the trailing six months was 33.31% in April, compared with 33.86% in March, 30.89% in February, and 27.31% in January.

In Europe, 24 new speculative-grade deals worth $9.94 billion came to market in April , following 23 deals ($14.59 billion) in March, three deals ($1.34 billion) in February, and 16 deals ($8.8 billion) in January.

Chart 9

We closely monitor issuance at the 'B-' level and lower because it is, in our view, indicative of investors' appetite (or lack of) for absorbing riskier assets. Entities rated at this end of the rating 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 to 2007 has been a source of defaults in recent quarters. We expect this pool of issuers to continue through its seasoning period and potentially experience more defaults in 2011. Over the long term (1981 to 2011), an average of 9.12% of all global entities rated 'B-' defaulted within 12 months, and the average default rate was much higher for entities rated below 'B-' (see table 8). At higher ratings, the average 12-month transition to default is much lower ( 5.9% for entities rated 'B', 2.62% for 'B+', and 1.30% for 'BB-'). The previous spike in issuance at these speculative-grade rating categories from 1997 to 1999 led to a peak 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 heightened issuance at the 'B-' level and lower from 2003 to 2007 was an early warning of the credit deterioration and default pressure in 2008 and 2009.

Table 8

Global Corporate Transition Matrix (%) (1981-2010)
Rating AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC/C D
AAA 87.91 4.72 2.68 0.68 0.16 0.24 0.14 0.00 0.05 0.00 0.03 0.05 0.00 0.00 0.03 0.00 0.05 0.00
AA+ 2.56 76.09 11.72 3.93 0.89 0.65 0.30 0.12 0.12 0.06 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
AA 0.49 1.32 80.62 8.02 2.90 1.41 0.43 0.41 0.14 0.09 0.05 0.04 0.02 0.00 0.00 0.02 0.05 0.02
AA- 0.05 0.13 4.30 76.98 9.98 2.83 0.70 0.27 0.14 0.07 0.04 0.00 0.00 0.04 0.11 0.02 0.00 0.04
A+ 0.00 0.11 0.58 4.46 77.43 8.80 2.57 0.71 0.40 0.09 0.09 0.12 0.01 0.09 0.04 0.01 0.00 0.07
A 0.05 0.06 0.28 0.56 5.01 77.71 6.82 2.70 1.15 0.28 0.15 0.15 0.10 0.12 0.03 0.01 0.02 0.09
A- 0.06 0.01 0.11 0.20 0.61 6.75 75.84 7.49 2.36 0.68 0.16 0.15 0.16 0.14 0.04 0.01 0.05 0.08
BBB+ 0.00 0.01 0.07 0.09 0.31 1.05 6.93 73.18 8.86 2.00 0.47 0.40 0.17 0.26 0.15 0.02 0.10 0.16
BBB 0.01 0.01 0.06 0.04 0.17 0.48 1.23 7.03 74.24 6.29 1.62 0.83 0.37 0.31 0.17 0.04 0.09 0.23
BBB- 0.01 0.01 0.01 0.07 0.07 0.24 0.40 1.39 8.57 71.10 5.48 2.58 1.03 0.56 0.34 0.22 0.31 0.38
BB+ 0.07 0.00 0.00 0.05 0.02 0.14 0.12 0.63 2.27 11.59 62.87 6.40 3.21 1.26 0.82 0.19 0.53 0.56
BB 0.00 0.00 0.06 0.02 0.00 0.10 0.08 0.23 0.74 2.57 8.54 64.26 7.73 2.68 1.37 0.46 0.72 0.80
BB- 0.00 0.00 0.00 0.01 0.01 0.01 0.07 0.13 0.30 0.48 2.06 8.23 63.74 8.43 3.06 0.97 0.93 1.30
B+ 0.00 0.01 0.00 0.04 0.00 0.04 0.09 0.05 0.07 0.10 0.34 1.58 6.91 65.05 7.65 2.63 1.96 2.62
B 0.00 0.00 0.02 0.02 0.00 0.09 0.07 0.04 0.11 0.04 0.23 0.39 1.69 8.42 57.65 7.96 5.42 5.90
B- 0.00 0.00 0.00 0.00 0.04 0.07 0.00 0.14 0.07 0.14 0.18 0.21 0.60 3.12 10.25 51.37 10.78 9.12
CCC/C 0.00 0.00 0.00 0.00 0.05 0.00 0.14 0.09 0.09 0.09 0.05 0.23 0.56 1.39 2.91 8.74 43.80 27.38
Sources: Standard & Poor's Global Fixed Income Research and Standard & Poor's CreditPro®.

Table 9

Entities Rated 'B-' Or Lower With Either Negative Outlooks Or Ratings On CreditWatch Negative
Rating combination and subsector Issuer Debt amount (mil. $) Country
B-/CreditWatch Negative
Capital goods Ranhill Berhad 220 Malaysia
Consumer products Shearer's Foods, Inc.* 119 U.S.
Media/entertainment River Rock Entertainment Auth 200 U.S.
Metals/mining/steel Essar Steel Algoma Inc. 785 Canada
B-/Outlook Negative
Aerospace/defense DAE Aviation Holdings Inc. 882 U.S.
Bank AGBank 0 Azerbaijan
Bank CentroCredit Bank JSC 0 Russia
Bank Doral Financial Corp. 733 U.S.
Bank Federal Bank for Innovation and Development 0 Russia
Bank KazInvestBank 0 Kazakhstan
Consumer products Liz Claiborne Inc. 808 U.S.
Consumer products PT Bakrie Sumatera Plantations Tbk. 160 Indonesia
Consumer products Reddy Ice Holdings Inc. 451 U.S.
Chemicals, packaging, and environmental services Kleopatra Lux 1 S.a.r.l 0 Luxembourg
Chemicals, packaging, and environmental services Pregis Corp. 470 U.S.
Chemicals, packaging, and environmental services Reichhold Industries Inc.* 195 U.S.
Chemicals, packaging, and environmental services Solo Cup Co. 625 U.S.
Forest products and building materials Norske Skogindustrier ASA 1,837 Norway
Health care Phibro Animal Health Corp. 300 U.S.
Health care Symbion Inc. 435 U.S.
High technology AmerCable Inc. 100 U.S.
Homebuilders/real estate companies M/I Homes, Inc. 338 U.S.
Insurance MBIA Inc. 8,300 U.S.
Media/entertainment AGS LLC (AGS Holdings LLC) 155 U.S.
Media/entertainment Cannery Casino Resorts, LLC 750 U.S.
Media/entertainment Cinram International Inc. 330 Canada
Media/entertainment CityCenter Holdings, LLC 5,000 U.S.
Media/entertainment Grupo Posadas, S. A. B. de C. V.¶ 236 Mexico
Media/entertainment Nelson Education Ltd. 482 Canada
Media/entertainment Revel AC, Inc. 850 U.S.
Media/entertainment Sugarhouse HSP Gaming Prop. Mezz. L.P. 225 U.S.
Media/entertainment Truvo N.V. 750 Belgium
Media/entertainment Yell Group PLC 0 U.K.
Metals/mining/steel Ryerson Holding Corp. 775 U.S.
Oil and gas EP Black Elk Energy Offshore Operations LLC 300 U.S.
Oil and gas EP Geokinetics Holdings Inc. (Geokinetics Inc.) 275 U.S.
Oil and gas EP Hercules Offshore Inc. 1,200 U.S.
Oil and gas EP Milagro Oil & Gas Inc.* 250 U.S.
Retail/restaurants Brookstone Inc.* 126 U.S.
Retail/restaurants Smart & Final Holdings Corp.* 1,065 U.S.
Telecommunications Maxcom Telecomunicaciones, S. A. B. de C. V. 200 Mexico
Transportation AMR Corp.* 5,411 U.S.
Transportation Trailer Bridge Inc. 85 U.S.
Transportation Travelport Holdings Ltd. 6,162 U.S.
Utility Centrais Eletricas Matogrossenses S.A. (Rede Empresas de Energia Eletrica S.A.) 38 Brazil
Utility Companhia de Energia Eletrica do Estado do Tocantins (Rede Empresas de Energia Eletrica S.A.) 0 Brazil
Utility Edison Mission Energy (Edison International) 4,530 U.S.
Utility Empresa Generadora de Electricidad Itabo, S. A. 115 Dominican Republic
CCC+/CreditWatch Negative
Transportation General Maritime Corp. 300 U.S.
CCC+/Outlook Negative
Aerospace/defense Hawker Beechcraft Inc. 2,378 U.S.
Bank Anglo Irish Bank Corp. Ltd. 8,470 Ireland
Capital goods Stanadyne Holdings Inc. 218 U.S.
Consumer products PT Davomas Abadi Tbk.* 117 Indonesia
Consumer products Quality Home Brands Holdings LLC 232 U.S.
Chemicals, packaging, and environmental services AGY Holding Corp. 175 U.S.
Chemicals, packaging, and environmental services Yioula Glassworks S.A. 189 Greece
Finance companies NCO Group Inc 934 U.S.
Finance companies Peach Holdings Inc. 300 U.S.
Financial institutions FirstBank Puerto Rico (First BanCorp) 0 U.S.
Forest products and building materials NewPage Corp. 2,930 U.S.
Homebuilders/real estate companies Hovnanian Enterprises Inc. 1,782 U.S.
Insurance MGIC Investment Corp.* 1,170 U.S.
Insurance PMI Group, Inc. (The) 1,141 U.S.
Insurance Radian Group Inc. 1,570 U.S.
Media/entertainment Bonten Media Group Inc. 171 U.S.
Media/entertainment SEAT PagineGialle SpA 6,521 Italy
Metals/mining/steel New Reclamation Group (Pty) Ltd. (The) 218 South Africa
Oil and gas EP Agri International Resources Pte. Ltd. 150 Singapore
Oil and gas EP Expro Holdings U.K. 3 Ltd. 3,627 U.K.
Oil and gas EP Varel Funding Corp. 160 U.S.
Telecommunications ERC Ireland Preferred Equity Ltd. 6,086 Ireland
Utility Centrais Eletricas do Para S.A. (Rede Empresas de Energia Eletrica S.A.) 38 Brazil
Utility Cheniere Energy Inc. 2,177 U.S.
CCC/CreditWatch Negative
Homebuilders/real estate companies William Lyon Homes¶ 310 U.S.
Media/entertainment Mohegan Tribal Gaming Authority 1,225 U.S.
Media/entertainment Waterford Gaming LLC 129 U.S.
Transportation Horizon Lines Inc. 455 U.S.
CCC/Outlook Negative
Consumer products Central Parking Corp. 266 U.S.
Chemicals, packaging, and environmental services Schoeller Arca Systems Holding B.V. 523 Netherlands
Chemicals, packaging, and environmental services Wastequip Inc. 331 U.S.
Forest products and building materials Builders FirstSource Inc. 140 U.S.
High technology Eastman Kodak Co. 1,838 U.S.
Media/entertainment Corporacion Interamericana de Entretenimiento, S. A. B. de C. V. 14 Mexico
Media/entertainment GateHouse Media Operating Inc. 1,195 U.S.
Media/entertainment Hanley Wood LLC 401 U.S.
Media/entertainment Holdings Gaming Borrower L.P. 304 U.S.
Media/entertainment Motorsport Aftermarket Group Inc. 160 U.S.
Media/entertainment Shingle Springs Tribal Gaming Authority 450 U.S.
Media/entertainment Wallace Theater Holdings, Inc. 157 U.S.
Oil and gas EP Delta Petroleum Corp. 265 U.S.
Oil and gas EP Energy Future Holdings Corp. 33,370 U.S.
Retail/restaurants Barneys New York Inc. 280 U.S.
Retail/restaurants Mastro's Restaurants LLC 100 U.S.
CCC-/CreditWatch Negative
Financial institutions NZF Money Ltd. 0 New Zealand
CCC-/Outlook Negative
Finance companies GFNZ Group Ltd.* 0 New Zealand
Health care LifeCare Holdings Inc. 402 U.S.
Media/entertainment Koosharem Corp. 459 U.S.
Metals/mining/steel Zlomrex S.A. 181 Poland
Oil and gas EP Dune Energy Inc.* 300 U.S.
Oil and gas EP OPTI Canada Inc 2,575 Canada
CC/CreditWatch Negative
Oil and gas EP Dynegy Inc. 5,792 U.S.
Transportation YRC Worldwide Inc. 0 U.S.
CC/Outlook Negative
Forest products and building materials China Forest products and building materialsry Holdings Co. Ltd.* 300 China
Media/entertainment Golden Nugget Inc. (Landry's Holdings, Inc.) 495 U.S.
Retail/restaurants El Pollo Loco Inc.* 258 U.S.
Global Fixed Income Research:Diane Vazza, Managing Director, New York (1) 212-438-2760;
diane_vazza@standardandpoors.com
Jacinto Torres, Director, New York (1) 212-438-3243;
jacinto_torres@standardandpoors.com
Research Contributors:Rafat Khan, CRISIL Global Analytical Center, an S&P affiliate, Mumbai
Debabrata Das, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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