Default, Transition, and Recovery: Global Weakest Links And Default Rates: The Global Default Rate Increased Slightly In October
|Publication date: 02-Dec-2011 10:40:20 EST|
The number of global weakest links increased marginally to 128 on Nov. 15 from 124 on Oct. 21. Weakest links are issuers rated 'B-' and lower with either negative outlooks or ratings on CreditWatch with negative implications. The 128 weakest links have total rated debt worth $193.1 billion.
So far, 41 issuers have defaulted globally in 2011 (through Nov. 15), six of which have defaulted since October. These defaulted issuers have combined outstanding debt worth $69.9 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 slightly increased to 1.68% in October from 1.65% in September. Regionally, the U.S. corporate speculative-grade corporate default rate increased to 2.06% from 1.94%, and the European default rate rose to 1.23% from 0.86%. The default rate in the emerging markets also increased to 0.58% from 0.52%.
- The U.S. has the most weakest links, with 83, or 64.8% of the global total. By sector, media and entertainment, banks, and forest products and building materials have the greatest concentrations of weakest links.
- The U.S. economy grew at an annualized rate of 2% in the third quarter of 2011, revised downward from the 2.5% initial GDP estimate. Our economists expect real GDP in the U.S. and eurozone to grow 1.8% and 1.6%, respectively, in 2011, and 1.7% and 1.1% in 2012.
- After a strong first half of the year, global corporate speculative-grade issuance plummeted in August because investors became more wary of the slowing global economy. In the U.S., speculative-grade deal flow improved slightly in November because of some improvements in economic metrics and reduced recession risks. In the past three months, 58 speculative-grade deals (worth $35.2 billion) came to market--15 in September, 17 in October, and 26 in November (through Nov. 15). In Europe, speculative-grade issuance activity remained low, with only 11 new deals in the past three months--three in September, three in October, and five in November (through Nov. 15).
- The U.S. speculative-grade spread started increasing at the beginning of August because of the growing uncertainty in the global financial markets. The spread peaked at 830 basis points (bps) on Oct. 4 before declining to 705 bps on Nov. 8.
- Our baseline forecast (with a 60% probability) is for a 12-month-forward (September 2012) corporate speculative-grade default rate of 3.1% in the U.S. (see chart 5 and table 3). To realize the mean baseline projection, a total of 48 speculative-grade-rated issuers would need to default in the next 12 months. This implies an average of about four defaults per month, higher than the average of about 2.3 defaults per month in the last 12 months. (For more details, see "U.S. Corporate Default Rate Expected To Rise To 3.1% By September 2012," published Nov. 4, 2011, on RatingsDirect on the Global Credit Portal.)
- Our alternative default rate forecasts are 5.1% for the pessimistic scenario and 1.6% for the optimistic scenario. From October 2011 to September 2012, 79 issuers would have to default to reach the pessimistic default rate forecast, and 25 issuers would have to default to reach the optimistic forecast.
- Companies rated 'B-' and lower have a notable amount of debt coming due over the next four years. In the U.S., approximately $213 billion in debt rated 'B-' and lower will mature from second-quarter 2011 through 2015. (For more details, see "U.S. Refinancing Study: Rising Maturities Could Increase Refinancing Risk, Especially For 'B' And 'CCC' Rated Issuers ," published July 20, 2011.)
- The 12-month-trailing default rate for U.S. leveraged loans (based on the number of loans) was 0.92% in October, compared with 0.90% in September and 1.05% in August. The measure was 1.21% in July, 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 slightly in October to 1.68% from 1.65% in September (see table 1 and chart 1). In the U.S., the corporate speculative-grade default rate rose to 2.06% from 1.94%. The European speculative-grade default rate increased sharply to 1.23% from 0.86%, and the emerging markets default rate rose slightly to 0.58% from 0.52%.
|Default Rates (%)|
|*The U.S. default rate includes issuers incorporated in U.S. tax havens (for example, Bermuda and 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 Oct. 31, 2011. Subject to revision. Source: Standard & Poor's CreditPro®.|
The widespread decline in default rates from six months and 12 months ago reflects the 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 the fragile economy, the continued weakness in the housing market, and the sectors' cyclicality and dependence on strong consumer spending.
|Trailing 12-Month Corporate Default Rates By Industry (U.S. Speculative-Grade Issuers Only*)|
|Subsector||10/31/2011||9/30/2011||Six months ago||12 months ago|
|Energy and natural resources||0.71||0.71||2.27||4.20|
|Forest and building products/homebuilders||4.62||4.69||1.64||8.20|
|High technology/computers/office equipment||0.00||0.00||0.00||0.00|
|*The U.S. default rate includes issuers incorporated in U.S. tax havens (for example, Bermuda and Cayman Islands). Data as of Oct. 31, 2011. Sources: Standard & Poor's Global Fixed Income Research and Standard & Poor's CreditPro®.|
In 2011 (through Nov. 8), global corporate defaults, including confidential defaulters, totaled 41 and accounted for $69.9 billion in debt (see table 3). By comparison, 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).
Six entities have defaulted since our most recent weakest links report (through Nov. 8):
- On Oct. 26, 2011, Standard & Poor's Ratings Services lowered its long-term corporate credit rating on Trailer Bridge Inc. to 'SD' from 'CCC' and removed it from CreditWatch. At the same time, we lowered our rating on the company's senior secured notes to 'CC' from 'CCC'. The rating on the notes remains on CreditWatch with negative implications. The rating actions reflect confidential information that Trailer Bridge has made available to Standard & Poor's regarding its debt obligations. (For more details, see "Trailer Bridge Inc. Downgraded to 'SD'; Note Rating Lowered To 'CC' On Imminent Refinancing Risk," published on Oct. 26, 2011.)
- On Oct. 31, 2011, Standard & Poor's lowered its counterparty credit rating on MF Global Holdings Ltd. to 'D' from 'BBB-'. We placed the rating on MF Global on CreditWatch negative on Oct. 26, 2011, following the company's announcement of a large generally accepted accounting principles (GAAP) loss for its quarter ended Sept. 30, 2011. The CreditWatch placement reflected our view that the company would be unable to generate near-term profitability and that the company would suffer potential funding pressure as confidence eroded. MF Global filed for Chapter 11 bankruptcy protection on Oct. 31, 2011. (For more details, see "MF Global Holdings Ltd. Downgraded To 'D' After Chapter 11 Filing," published on Oct. 31, 2011.)
- On Nov. 2, 2011, Standard & Poor's lowered its corporate credit rating on U.S.-based Hovnanian Enterprises Inc. to 'SD' from 'CC', and we lowered our ratings on the company's rated senior unsecured notes to 'D' from 'C'. The recovery rating on these issues remain unchanged at '6', indicating the expectation of negligible (0%-10%) recovery for lenders in the event of a payment default. The rating actions follow the company's announcement that it completed its debt exchange offer. The company exchanged $195 million of its seven series of senior unsecured notes for $195 million of new senior secured notes, which comprise $141.8 million 5% senior secured notes due 2021 and $53.2 million 2% senior secured notes due 2021. (For more details, see "Hovnanian Enterprises Inc. Corporate Credit Rating Lowered To 'SD' After Distressed Tender Offer," published on Nov. 2, 2011.)
- On Nov. 2, 2011, Standard & Poor's lowered its issuer credit rating on Native American casino operator River Rock Entertainment Authority (RREA), as well as its issue-level rating on RREA's existing $200 million senior notes, to 'D' from 'CCC'. The rating actions followed RREA's failure to repay the principal on its existing $200 million senior notes at maturity. Further, we also withdrew the preliminary 'B-' issue-level rating on RREA's proposed $205 million senior notes, as well as the issue-level rating on the existing notes. (For more details, see "River Rock Entertainment Authority Rating Lowered To 'D' On Missed Senior Notes Payment," published on Nov. 2, 2011.)
- On Nov. 8, 2011, Standard & Poor's lowered to 'D' from 'CC' its corporate credit rating and all issue ratings on Dynegy Holdings LLC (DH) as well as the ratings on the pass-through certificates at Dynegy Danskammer LLC and Dynegy Roseton LLC following the bankruptcy filing by DH on Nov. 7, 2011. These rating actions follow the bankruptcy filing by DH and four of its wholly owned subsidiaries: Dynegy Northeast Generation Inc., Hudson Power LLC., Dynegy Danskammer LLC (Danskammer), and Dynegy Roseton LLC. On Nov. 1, 2011, Dynegy Holdings LLC missed a $43.8 million interest payment on its 8.375% senior-unsecured note due 2016. (For more details, see "Corporate Credit Rating On Dynegy Holdings LLC Lowered To 'D' & Outlook To Negative On Dynegy Inc. & Dynegy Power," published on Nov. 8, 2011.)
- On Nov. 8, 2011, Standard & Poor's lowered its long-term corporate credit rating on Italy-based international publisher of classified directories SEAT PagineGialle SpA (SEAT) to 'SD' from 'CC'. At the same time, we lowered the issue rating on related entity Lighthouse International Co. S.A.'s €1.3 billion subordinated notes to 'D' from 'C'. The rating actions followed SEAT's delayed interest payment (about €52 million) on Lighthouse International's subordinated bonds beyond the fifth business day after the scheduled due date. The payment due date fell on Oct. 31, 2011. SEAT is using the 30-day grace period provided in the notes' indentures because it is in the process of restructuring its balance sheet. (For more details, please see "Italy-Based Seat PagineGialle Downgraded To 'SD' On Missed Interest Payment On Subordinated Notes," published on Nov. 8, 2011.)
|Global Corporate Defaults In 2011*|
|Company name||Country||Industry||Debt amount (mil. $)||Default date|
|SAZKA a.s.||Czech Republic||Leisure time/media||203||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||4/4/2011|
GFNZ Group Ltd.
|New Zealand||Financial institutions||30||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||4/12/2011|
|Texas Competitive Electric Holdings Co. LLC (Energy Future Holdings Corp.)||U.S.||Energy/natural resources||32,460.29||4/20/2011|
|Keystone Automotive Operations Inc.||U.S.||Consumer/service sector||445.6||4/28/2011|
|Berkline/BenchCraft Holdings LLC||U.S.||Consumer/service sector||0||5/2/2011|
|Caribe Media Inc||U.S.||Leisure time/media||464||5/6/2011|
|OPTI Canada Inc||Canada||Energy/natural resources||2,743.14||6/16/2011|
|Novasep Holding S.A.S.||France||Health care/chemicals||533.84||6/22/2011|
|NBC Acquisition Corp.||U.S.||Consumer/service sector||527||6/27/2011|
|Real Mex Restaurants Inc.||U.S.||Consumer/service sector||220||7/20/2011|
|NZF Money Ltd.||New Zealand||Financial institutions||0||7/25/2011|
|YRC Worldwide Inc.||U.S.||Transportation||816.27||7/27/2011|
|William Lyon Homes||U.S.||Real estate||485.76||8/19/2011|
|PMI Mortgage Insurance Co.||U.S.||Insurance||285||8//22/2011|
|Horizon Lines Inc.||U.S.||Transportation||598.19||8/23/2011|
|Global Aviation Holdings Inc.||U.S.||Transportation||230.23||8/23/2011|
|NewPage Corp.||U.S.||Forest products and building materials||3,227.80||9/7/2011|
|General Maritime Corp.||U.S.||Transportation||2,165.66||10/4/2011|
|Real Mex Restaurants Inc.(B)||U.S.||Retail/restaurants||210.2||10/4/2011|
|Travelport Holdings Ltd.||U.S.||Transportation||7,428.79||10/5/2011|
|Yioula Glassworks S.A.||Greece||Chemicals, packaging, and environmental services||419.16||10/7/2011|
|William Lyon Homes (B)||U.S.||Homebuilders/real estate companies||485.83||10/11/2011|
|Wastequip Inc.||U.S.||Chemicals, packaging, and environmental services||371.5||10/19/2011|
|Trailer Bridge Inc.||U.S.||Transportation||102.22||10/26/2011|
|MF Global Holdings Ltd.||U.S.||Financial institutions||2,517.00||10/31/2011|
|River Rock Entertainment Auth||U.S.||Leisure time/media||0||11/02/2011|
|Hovnanian Enterprises Inc.||U.S.||Forest products and building materials||1,132.00||11/02/2011|
|Dynegy Holdings LLC||U.S.||Energy/natural resources||1,100.00||11/08/2011|
|SEAT PagineGialle SpA||Italy||Leisure time/media||4,524.00||11/08/2011|
|*Excludes confidential entities. Data as of Nov. 11, 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) was 0.92% in October, slightly up from 0.90% in September and 1.05% in August. 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) fell to 6.29% in October from 6.75% in September (see chart 2).
This Month's Weakest Links
The number of global weakest links increased to 128 as of Nov. 15 from 124 in the previous month and 110 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 128 weakest links account for a total of $193.1 billion in debt. Negative outlooks and ratings on CreditWatch negative are good leading indicators of actual downgrades. The one-year default rate for the weakest links was, on average, 7.2x higher than it was for all speculative-grade-rated issuers from 1999-2010 and 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 speculative-grade-rated issuers from 1999-2010 and 7.6x higher than the speculative-grade default rate toward the end of 2007. Of the 228 weakest links as of the beginning of 2010, 40 entities defaulted by year-end 2010, 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. 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 32 of the 41 defaulted companies thus far in 2011.
Since our most recent report, we removed seven entities from our list of weakest links and added 11 others. Four of the seven entities that we removed from the list were U.S. entities, with the remaining entities from Europe, Asia/Pacific, and Canada. We removed the following entities from the list:
- Nelson Education Ltd. after we revised its outlook to stable;
- Contech Construction Products Inc., GITI Tire Pte. Ltd., Chukchansi Economic Development Authority, and Koosharem Corp. because Standard & Poor's no longer rates these entities;
- SEAT PagineGialle SpA after the company selectively defaulted; and
- River Rock Entertainment Authority after the company defaulted.
We added the following entities to the weakest link list:
- Lantiq Beteiligungs-GmbH & Co. KG after we downgraded the company to 'CCC+' and assigned it a negative outlook;
- SuperMedia Inc. after we downgraded the company to 'CC' and assigned it a negative outlook;
- Cemex S.A.B. de C.V., Ozburn-Hessey Holding Co. LLC, and PT Berlian Laju Tanker Tbk. after we lowered the corporate credit ratings on the companies to 'B-' and assigned negative outlooks;
- National Commercial Bank Jamaica Ltd. after we revised its outlook to negative;
- FCC Holdings LLC, and GMX Resources Inc. after we placed the ratings on companies on CreditWatch with negative implications;
- Gentiva Health Services Inc. and Residential Capital LLC after we lowered the ratings on the companies and placed them on CreditWatch negative; and
- Republic Mortgage Insurance Co. after we lowered the corporate credit rating on the company and assigned a negative outlook.
Of the 11 new weakest links, seven are from the U.S. region, two are from Latin America, and one each is from Asia-Pacific and Europe.
Based on the number of weakest links, we believe that the media and entertainment, banks, and forest products and building materials sectors are most vulnerable to default (see chart 3). The media and entertainment sector has the greatest number of weakest links, with 28 entities, or 21.9% of the total. Banks and forest products and building materials have 13 weakest links each.
U.S.-based issuers (a category in which we include issuers in tax havens such as Bermuda and the Cayman Islands) account for 64.8% of the 128 weakest links (see table 4). This preponderance is partially due to the fact that a large proportion of Standard & Poor's rated issuers are in the U.S. By volume, the 83 U.S.-based weakest links account for about $115 billion of debt, which is 59.9% of the total $193 billion for all of the weakest links.
|Geographical Distribution Of Weakest-Rated Issuers|
|Eastern Europe/Middle East/Africa||9||7.0|
|Data as of Nov. 15, 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 (September 2012) corporate speculative-grade default rate of 3.1% in the U.S. (see chart 4). To realize the mean baseline projection, a total of 48 speculative-grade-rated issuers would need to default in the next 12 months. This implies an average of about four defaults per month, higher than the average of about 2.3 defaults per month in the last 12 months.
The economic assumptions of our baseline projection indicate that the pace of recovery will remain slow in the next few years (see "U.S. Economic Forecast: A New Lease On Life?," published Oct. 14, 2011). Consumers remain guarded and spending will continue to be weak, growing by only 2.1% in 2012. This is partly due to the continued weakness in the labor market, where unemployment will remain at about 9% through 2013. Equipment investment growth will slow to 6.8% in 2012 from 10.3% in 2011. Nonresidential construction will stagnate in 2012, while lackluster demand, excess inventory from unsold homes, and more foreclosures that are moving along the process will hamper residential construction growth. The Fed will likely hold off on raising interest rates (given the moderate inflation pressures) to give the economy more time to improve. It is possible that the Fed will engage in another round of quantitative easing (QE3), following its announced move to extend the maturities on its balance sheet (Operation Twist).
In a less-likely pessimistic scenario, the government's inability to forge a fiscal policy to support the economy in the short term and to enact long-term structural reforms would hurt consumer and investor confidence. Spending and investments would fall, pushing the economy back into a recession that lasts until mid-2012. Real GDP would decline 1.1% from peak to trough, in addition to the 5.1% decline in the last recession. Europe and Japan would also undergo a deeper downturn, which would hurt not only export growth, but also investor confidence. This would, in turn, depress U.S. markets further. Businesses would pull back on spending and hiring and increase layoffs. The unemployment rate would rise to 10% in 2012. Oil prices would fall due to soft demand, which would keep core inflation low at 1.4% in 2012. The Fed would maintain its accommodative monetary policy, and interest rates would remain at or near historic lows. Weakness in the housing sector would continue, with housing starts falling to a record low in 2012. Home prices would drop another 15% in 2012 as the low home prices in pre-closure and foreclosure would put pressure on prices of existing and new home sales. (For more details, see "U.S. Risks To The Forecast: The Recovery Is A-Changin'," published Sept. 26, 2011.) Under such a scenario, we expect the default rate to rise to 5.1% by September 2012 and possibly higher beyond that time horizon. A total of 79 issuers would need to default from October 2011 to September 2012 to realize the pessimistic scenario.
Conversely, a relatively optimistic scenario suggests a default rate of 1.6% by September 2012, just below the 1.9% in September 2011. A total of 25 issuers would need to default to realize this projection, or about 2.1 defaults per month in the next 12 months. A smooth and stable political process would lead to the passage of President Obama's entire American Jobs Act and a compromise among the 12 members of the congressional debt-reduction committee to tackle escalating entitlement costs and enhance tax revenues. GDP growth in the second half of 2011 would be stronger than in the first half. With government stimulus kick-starting the recovery, the Federal Open Market Committee would increase interest rates 50 bps in second-quarter 2012, earlier than the mid-2013 date that the Fed had previously indicated. Businesses would post stronger profits, which would spur more hiring. Unemployment would decline steadily to about 8% by the end of 2012. The improved labor market would lead to greater consumer spending, and the still relatively low mortgage rates and stronger economy would help the housing sector rebound faster.
We determine our forecast based on a variety of factors, including 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 the unemployment rate increases or as the proportion of entities with negative outlooks or ratings on CreditWatch negative rises, default rates usually increase.
Macroeconomic Sources Of Default Rates
The U.S. speculative-grade spread started increasing in the beginning of August because of the growing uncertainty in the global financial markets. The spread peaked at 830 bps on Oct. 4 before declining to 705 bps on Nov. 8, which is higher than the 694 bps as of Oct. 31 and the 585 bps a year ago. The U.S. corporate investment-grade spread increased slightly to 209 bps as of Nov. 8 from 203 bps as of Oct. 31, 2011, and 199 bps as of Nov. 8, 2010. 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 Nov. 14, 2011, 15.7% of all U.S. corporate speculative-grade issues were trading at distressed levels (see chart 5). The distress ratio was 19.3% in October and 14.9% in September 2011 and was at an all-time high of 85% in December 2008.
|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|
|Source: Standard & Poor's Global Fixed Income Research.|
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. Ten sectors have experienced an increase in their proportions of the total distressed universe since October, and 11 sectors have experienced a decrease. The sector with the largest decrease in its proportion of the total was chemicals, packaging, and environmental services--it fell by 1.2% month over month to 5%. The health care sector also experienced a decline in its proportion of total distressed issues, by 1% from last month. The number of distressed issues in the sector declined to 19 from 26 a month ago. The sector's distress ratio increased sharply in the third quarter after remaining between 1% and 2% during the first half of the year. Despite a modest decline to 15.2% on Nov. 14 from 21.3% a month ago, the ratio remains almost double the sector's eight-year (2003-2010) average of 8.4%. The financial institutions sector experienced the largest increase in the number of distressed issues. The sector had a distress ratio of 15.1% on Nov. 14, up slightly from 14.3% on Oct. 14. The sector's distress ratio spiked to 9.3% in August from 2.1% in July, as fears of a meltdown in the developed economies triggered increased investor skepticism about the health of the financial sector. Finally, the homebuilders/real estate sector had no issues trading at 1,000 bps or higher, resulting in a distress ratio of zero. This is a result of the sector's small rated universe, with no speculative-grade-rated issues. (For more details, see "Distressed Debt Monitor," published Nov. 17, 2011.)
In the third quarter, the U.S. economic growth rate was revised to 2% from 2.5%. Our economists expect the U.S. and eurozone real GDP to grow 1.8% and 1.6%, respectively, in 2011, and 1.7% and 1.1% in 2012. Industrial production increased 0.7% in October after declining 0.1% in September.
The unemployment rate declined slightly to 9% in October from 9.1% 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 80,000 in October, after the data for September and August were upwardly revised to 158,000 and 104,000, respectively (previously, there were 103,000 additions in September and 57,000 additions in August). We anticipate that the labor market will remain weak, and we forecast an unemployment rate of 9.1% for 2011 and 9.2% for 2012.
Although the GDP growth in the third quarter was better than expected, the U.S. manufacturing sector expanded only modestly in October, according to the Institute for Supply Management (ISM). ISM's manufacturing index dropped 0.8 points to 50.8 points in October from 51.6 points in September. However, the reading is much lower than February's high of 61.4 points. Nonetheless, the index has remained above the 50-point threshold, which indicates unchanged activity. As with the headline number, most of the index's subcategories also reported slowing of growth since September. The production index decreased by 1.1 points to 50.1 points in October and inventories dropped 5.3 points to 46.7. Meanwhile, the new orders index increased 2.8 points to 52.4 and the backlog of orders went up 6 points to 47.5. The employment index dropped modestly to 53.5 points in October, and the prices index fell 15 points to 41.0 points. The exports and imports indices decreased 3.5 points and 5.0 points, respectively.
Results from the Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices in October 2011 indicate that fewer banks eased lending standards and terms for commercial and industrial (C&I) loans, particularly for large and middle-market firms (firms with annual sales of $50 million or more). According to the survey, both domestic and foreign banks have tightened standards or terms on C&I loans because of an unfavorable or more uncertain economic outlook. However, the survey had mixed results. A moderate fraction of banks reported weaker demand for C&I loans, compared with increased demand reported in the previous three surveys. Some large domestic banks have continued to witness stronger demand. For large- and medium-size firms, a net 5.9% of banks reported loosening lending standards in the October 2011 survey (see table 6 and chart 7). For small firms, a net 6.2% of banks reported loosening lending standards in October, compared with a net 7.8% in July. According to the survey, weaker demand for C&I loans outnumbered reports of stronger demand in a reversal from the past few quarters, particularly with respect to demand from large and middle-market firms.
|The Fed's Senior Loan Officer Opinion Survey: October 2011|
|Net % of domestic banks reporting:||Oct-11||Jul-11||Apr-11||Jan-11||Oct-10||Jul-10||Apr-10||Jan-10||Oct-09||Jul-09||Apr-09||Jan-09||Oct-08||Jul-08|
|Large and medium firms||(5.90)||(21.80)||(16.40)||(10.50)||(10.50)||(8.80)||(7.10)||(5.50)||14.00||31.50||39.60||64.20||83.60||57.60|
|Large and medium firms||(15.70)||20.00||27.30||28.10||(7.00)||1.80||(7.10)||(25.50)||(31.60)||(44.40)||(60.40)||(60.40)||(16.70)||(3.80)|
|Increasing spreads of loan rates over banks' cost of funds|
|Large and medium firms||(41.20)||(54.50)||(54.50)||(47.40)||(33.30)||(49.10)||(7.10)||9.10||40.40||59.30||79.20||92.50||98.20||80.80|
|Tightening standards for mortgages to individuals|
|More willingness to make consumer installment loans|
|Demand for loans to households|
|Source: Board of Governors of the Federal Reserve System.|
Overall eurozone GDP was up only 0.2% in the third quarter, maintaining the same growth recorded in the second quarter. The eurozone unemployment rate was 10.2% in September, compared with 10.1% in August. Industrial production in the eurozone plunged by 2% in September (see chart 8), compared with a 1.4% increase in August. The eurozone purchasing managers' index for the manufacturing sector contracted for the third successive month in October to a 26-month low of at 47.1 points from 48.5 points in September, as the recovery slowed in the region's key economies. Due to continued economic stress in Europe, our economists now estimate the probability of a recession in Western Europe next year at about 40%. (For more details, see "The Specter Of A Double Dip In Europe Looms Larger," published Oct. 4, 2011.)
Results from the October 2011 European Central Bank's Euro Area Bank Lending Survey indicated a noteworthy rise in net tightening of credit standards in comparison with the second quarter of 2011. The surveyed banks reported that lending standards for loans to small, medium, and large enterprises tightened significantly. In the third quarter, banks reported an 8% decline in demand for loans from enterprises, the first decline since second-quarter 2010, compared with a 4% rise in demand in the previous survey. This noticeable contraction of loan demand is due to an uncertain economic outlook and the sovereign debt crisis in the region. This indicates a decline in the need to finance fixed investment and a lower contribution of financing needs linked to inventories and working capital.
|Changes In Credit Standards Applied To Enterprises Over The Past Three Months (%)|
|Eurozone-Weighted Results For All Responding Banks|
|--Overall--||--Loans to SMEs--||--Loans to large enterprises--||--Short-term loans--||--Long-term loans--|
|Remained basically unchanged||87||88||90||86||84||81||86||89||84||80|
|Net percentage (tightened - eased)||2||16||3||14||3||19||(3)||11||8||20|
|Number of banks responding||117||117||115||115||112||112||117||117||116||116|
|Data as of October 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 Website.|
Monitoring The Pipeline Of Low-Rated Issuance Activity
After a strong first half of the year, global corporate speculative-grade issuance plummeted in August as investors became more wary of a slowing global economy. However, with better-than-expected third-quarter GDP in the U.S., global corporate speculative-grade issuance started increasing. Globally, 58 speculative-grade deals (worth $35.2 billion) came to market in the past three months--15 in September, 17 in October, and 26 in November (through Nov. 15). In the first 10 months of 2011, global speculative-grade issuance totaled $267.8 billion from the 579 new corporate speculative-grade deals that came to market. New speculative-grade issuance totaled $345 billion in 2010, $203 billion in 2009, and $56 billion in 2008.
In the U.S., 13 new speculative-grade deals came to market in October following only 12 deals in September and 17 deals in November (through Nov.15). The dollar volume of new issuance was $7.8 billion in October, compared with $5.6 billion in the previous month. In November (through Nov. 15), the dollar volume of new issuance reached $13.8 billion. During the first 10 months of 2011, new deals totaled 361 (worth $161.6 billion). By comparison, there were 162 new speculative-grade deals (worth $69 billion) in fourth-quarter 2010 and 125 (worth $62 billion) in the third quarter. 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.
Of the total $7.8 billion of U.S. speculative-grade issuance in October, $1.1 billion (14.4%) was rated 'B-' or lower. New issues rated 'B-' or lower in the trailing six months as a proportion of total speculative-grade issuance were 34.2% in October, down from 37.2% in August (see chart 9). In the third quarter, 40.5% of the new speculative-grade deals that came to market were rated 'B-' or lower, compared with 36.9% in the second quarter. On an annual basis, this ratio was 28.4% in 2010, 21.4% in 2009, 17.3% in 2008, and 48.8% in 2007. Measured by dollar volume, the proportion of debt issued in the trailing six months by issuers rated 'B-' and lower was 34.1% in October, compared with 37.8% in September and 37.1% in August.
In Europe, speculative-grade issuance activity has remained extremely low since the European sovereign debt crisis began to take its toll on the financial markets. Only five new deals came to market in November (through Nov. 15) and three in October. In the third quarter, new speculative-grade deals totaled eight (worth $4.8 billion). By comparison, there were 55 new deals (worth $26.6 billion) in the second quarter and 43 (worth $25 billion) in the first quarter.
We closely monitor issues rated 'B-' 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 2003-2007 has been a source of defaults in recent quarters. We expect this pool of issuers to continue through its seasoning period and to potentially experience more defaults in 2011. Over the long term (1981-2011), an average of 9.15% of all global entities rated '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, 2.62% for entities rated 'B+', 1.31% for entities rated 'BB-'). The previous spike in issuance at these speculative-grade rating categories from 1997-1999 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 2003-2007 was an early warning of the credit deterioration and default pressure in 2008 and 2009.
|Global Corporate Transition Matrix (%) (1981-2010)|
|Sources: Standard & Poor’s Global Fixed Income Research and Standard & Poor’s Credit Pro®.|
|Entities Rated ‘B-’ Or Lower With Either Negative Outlooks Or Ratings On CreditWatch Negative|
|Rating combination and subsector||Issuer||Debt (mil. $)||Country|
|Finance companies||FCC Holdings, LLC*||100||U.S.|
|Forest products and building materials||Atrium Cos. Inc. (ACIH)||185||U.S.|
|Health care||Gentiva Health Services Inc.*||1052||U.S.|
|Utility||Public Power Corp. S.A.||0||Greece|
|Bank||Doral Financial Corp.||733||U.S.|
|Bank||Federal Bank for Innovation and Development||0||Russia|
|Bank||LLC CB Koltso Urala||0||Russia|
|Bank||National Commercial Bank Jamaica Ltd.*||0||Jamaica|
|Bank||OJSC Belvnesheconombank (Russian Federation)||0||Belarus|
|Capital goods||CST Industries, Inc.||155||U.S.|
|Capital goods||Lupatech S.A.||0||Brazil|
|Chemicals, packaging, and environmental services||Reichhold Industries Inc.||195||U.S.|
|Chemicals, packaging, and environmental services||Solo Cup Co.||625||U.S.|
|Consumer products||Creativ Group OJSC||0||Ukraine|
|Consumer products||Reddy Ice Holdings Inc.||451||U.S.|
|Consumer products||Shearer's Foods, Inc.||119||U.S.|
|Consumer products||Simmons Foods, Inc.||1855||U.S.|
|Forest products and building materials||Ainsworth Lumber Co. Ltd.||453||Canada|
|Forest products and building materials||Cemex S.A.B. de C.V.*||10301||Mexico|
|Forest products and building materials||Coastal Greenland Ltd.||150||China|
|Forest products and building materials||New Enterprise Stone & Lime Co. Inc.||500||U.S.|
|Forest products and building materials||Norske Skogindustrier ASA§||1427||Norway|
|Forest products and building materials||Shanghai Zendai Property Ltd.||150||China|
|Forest products and building materials||SRE Group Ltd.||200||China|
|Forest products and building materials||Texas Industries Inc.||650||U.S.|
|Health care||Phibro Animal Health Corp.||300||U.S.|
|Homebuilders/real estate companies||Beazer Homes USA Inc.||1240||U.S.|
|Homebuilders/real estate companies||M/I Homes, Inc.||138||U.S.|
|Insurance||Belarusian National Reinsurance Organization||0||Belarus|
|Media and entertainment||AGS LLC (AGS Holdings LLC)||155||U.S.|
|Media and entertainment||CityCenter Holdings, LLC||5000||U.S.|
|Media and entertainment||Dex One Corp.||3385||U.S.|
|Media and entertainment||Grupo Posadas, S. A. B. de C. V.||200||Mexico|
|Media and entertainment||MTR Gaming Group Inc.||825||U.S.|
|Media and entertainment||ProQuest LLC||850||U.S.|
|Media and entertainment||Revel AC, Inc.||850||U.S.|
|Media and entertainment||Spanish Broadcasting System Inc.||400||U.S.|
|Media and entertainment||Sugarhouse HSP Gaming Prop. Mezz. L.P.||705||U.S.|
|Media and entertainment||Truvo N.V.||725||Belgium|
|Metals, mining, and steel||AmerCable Inc.||100||U.S.|
|Metals, mining, and steel||Essar Steel Algoma Inc.||785||Canada|
|Metals, mining, and steel||Ryerson Holding Corp.||775||U.S.|
|Oil and gas exploration and production||Hercules Offshore Inc.||1200||U.S.|
|Oil and gas exploration and production||Hudson Products Holdings Inc.||220||U.S.|
|Oil and gas exploration and production||Milagro Oil & Gas Inc.||250||U.S.|
|Retail/restaurants||Orchard Supply Hardware LLC (Sears Holdings Corp.)||174||U.S.|
|Retail/restaurants||Smart & Final Holdings Corp.||665||U.S.|
|Transportation||Coach America Holdings Inc.||300||U.S.|
|Transportation||Ozburn-Hessey Holding Co. LLC*||587||U.S.|
|Transportation||PT Berlian Laju Tanker Tbk.*||400||Indonesia|
|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)||4530||U.S.|
|Utility||Empresa Distribuidora Y Comercializadora Norte S.A.||596||Argentina|
|Utility||Empresa Generadora de Electricidad Itabo, S. A.||115||Dominican Republic|
|Media and entertainment||SuperMedia Inc.*||2750||U.S.|
|Oil and gas exploration and production||GMX Resources Inc.*||200||U.S.|
|Aerospace and defense||Hawker Beechcraft Inc.||2378||U.S.|
|Chemicals, packaging, and environmental services||AGY Holding Corp.||175||U.S.|
|Consumer products||Culligan International Co.||805||U.S.|
|Consumer products||PT Bakrie Sumatera Plantations Tbk.§||0||Indonesia|
|Consumer products||PT Davomas Abadi Tbk.||117||Indonesia|
|Finance companies||NCO Group Inc||934||U.S.|
|Forest products and building materials||Agri International Resources Pte. Ltd.||150||Singapore|
|High technology||Alion Science and Technology Corp.||560||U.S.|
|High technology||Lantiq Beteiligungs- GmbH & Co. KG*||210||Germany|
|Insurance||MGIC Investment Corp.||970||U.S.|
|Insurance||Radian Group Inc.||1570||U.S.|
|Media and entertainment||AMF Bowling Worldwide Inc.||325||U.S.|
|Media and entertainment||Bonten Media Group Inc.||171||U.S.|
|Media and entertainment||Educate Inc.||75||U.S.|
|Media and entertainment||Media General Inc.||300||U.S.|
|Media and entertainment||RDA Holding Co.||1050||U.S.|
|Media and entertainment||Sheridan Group Inc. (The)||0||U.S.|
|Media and entertainment||Vertrue LLC||1060||U.S.|
|Media and entertainment||Yell Group PLC||0||U.K.|
|Metals, mining, and steel||New Reclamation Group (Pty) Ltd. (The)||210||South Africa|
|Oil and gas exploration and production||Expro Holdings U.K. 3 Ltd.||3627||U.K.|
|Telecommunications||Maxcom Telecomunicaciones, S. A. B. de C. V.||200||Mexico|
|Utility||Cheniere Energy Inc.||2177||U.S.|
|Finance companies||Residential Capital, LLC (Motors Liquidation Co. (fka General Motors Corp.))*||5659||U.S.|
|Forest products and building materials||Catalyst Paper Corp.||640||Canada|
|Media and entertainment||Mohegan Tribal Gaming Authority||1075||U.S.|
|Media and entertainment||Waterford Gaming LLC||129||U.S.|
|Bank||Alpha Bank A.E.||26218||Greece|
|Bank||EFG Eurobank Ergasias S.A.||10131||Greece|
|Bank||Irish Bank Resolution Corp. Ltd.||5009||Ireland|
|Bank||National Bank of Greece S.A.||2071||Greece|
|Bank||Piraeus Bank S.A.||6146||Greece|
|Chemicals, packaging, and environmental services||Schoeller Arca Systems Holding B.V.||505||Netherlands|
|Consumer products||Central Parking Corp.||266||U.S.|
|Consumer products||Quality Home Brands Holdings LLC||232||U.S.|
|Forest products and building materials||Builders FirstSource Inc.||140||U.S.|
|High technology||Eastman Kodak Co.||1838||U.S.|
|Media and entertainment||ATI Acquisition Co.||248||U.S.|
|Media and entertainment||Cinram International Inc.||330||Canada|
|Media and entertainment||GateHouse Media Operating Inc.||1195||U.S.|
|Media and entertainment||Hanley Wood LLC||401||U.S.|
|Media and entertainment||Motorsport Aftermarket Group Inc.||160||U.S.|
|Media and entertainment||Shingle Springs Tribal Gaming Authority||450||U.S.|
|Media and entertainment||Wallace Theater Holdings, Inc.||157||U.S.|
|Oil and gas exploration and production||Energy Future Holdings Corp.||33366||U.S.|
|Retail/restaurants||Barneys New York Inc.||280||U.S.|
|Retail/restaurants||Jill Holdings LLC||240||U.S.|
|Retail/restaurants||Mastro's Restaurants LLC||100||U.S.|
|Chemicals, packaging, and environmental services||Aquilex Holdings LLC||410||U.S.|
|Finance companies||GFNZ Group Ltd.||0||New Zealand|
|Forest products and building materials||China Forestry Holdings Co. Ltd.||300||China|
|Homebuilders/real estate companies||Hovnanian Enterprises Inc.||1742||U.S.|
|Oil and gas exploration and production||Delta Petroleum Corp.||265||U.S.|
|Insurance||PMI Group, Inc. (The)||1141||U.S.|
|Transportation||Trailer Bridge Inc.||85||U.S.|
|Chemicals, packaging, and environmental services||Yioula Glassworks S.A.||183||Greece|
|Homebuilders/real estate companies||Republic Mortgage Insurance Co. (Old Republic International Corp.)*||0||U.S.|
|Oil and gas exploration and production||Dune Energy Inc.||300||U.S.|
|Oil and gas exploration and production||Dynegy Inc.§||1817||U.S.|
|Retail/restaurants||DirectBuy Holdings Inc.||335||U.S.|
|Telecommunications||ERC Ireland Preferred Equity Ltd.||5878||Ireland|
|*Indicates an issuer added to the list since the October 2011 commentary. §Indicates an issuer moving to a negative outlook from CreditWatch Negative or to CreditWatch Negative from a negative outlook since October 2011 commentary. Data as of Nov. 15, 2011 Source: Standard & Poor's Global Fixed Income Research.|
|Global Fixed Income Research:||Diane Vazza, Managing Director, New York (1) 212-438-2760;|
|Sarab Sekhon, CFA, Associate, New York (1) 212-438-6438;|
|Gregg Moskowitz, Associate, New York (1) 212-438-1838;|
|Research Contributor:||Debabrata Das, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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