Defaults in U.S. to accelerate through 2008, says S&P

Of the 17 global defaults in the first quarter, the 16 U.S.-based defaults affected debt worth $8.8 billion, according to an article published on 1st May 2008 by Standard & Poor's. The report, titled "U.S. Corporate Default Outlook: Defaults Rev Up As Leverage Unwinds," says that expressed as an annual rate, the first-quarter par-based default rate is 3.5% based on an estimated total outstanding U.S. high-yield volume at about $1 trillion.

"In line with our expectations, defaults in the U.S. have begun to climb notably, with the first-quarter pace equaling the total number of defaults in all of last year," said Diane Vazza, head of Standard & Poor's Global Fixed Income Group. "We expect defaults to continue to gain momentum through the rest of 2008 and 2009. Given the prevailing high levels of market volatility, a material risk remains that defaults could be significantly more pronounced and severe, especially if a recession were to be deeper and longer than expected."

At the end of March 2008, the trailing 12-month issuer-based global default rate for all rated entities rose to 0.48%. By region, the default rates were 0.70% in the U.S., 0.09% in Europe, and 0.10% in the emerging markets. If only speculative-grade entities are considered, the global default rate increased for the fourth consecutive month to 1.14%, well below the long-term (1981-2007) average of 4.35%. The U.S. led the charge, with its speculative-grade default rate increasing to 1.40%, its third consecutive increase from its 25-year low of 0.97% in December 2007, even though it has remained below its long-term average of 4.41% for 47 consecutive months.

Ms. Vazza added, "In our baseline scenario, for which we've assigned a 60% probability, we expect the U.S. speculative-grade default rate to escalate to a mean forecast of 4.7% in the next 12 months, with a one standard deviation range of 3.6% to 5.9%. This predicted range is significantly higher than the 1.4% default rate in March 2008 and the 25-year low of 0.97% in December 2007. The increase in defaults reflects the unfolding recessionary conditions, weaker earnings prospects, and continued financial pressures that will increase lending constraints."

(This is press release of Standard & Poor's)

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