Years Of Heady Growth Usher In Corporate Casualties, Default Study Says

Following many years of favourable credit conditions, ratings trends deteriorated dramatically in 2008, says an article published today by Standard & Poor's.

The article, titled 2008 Annual Global Corporate Default Study And Rating Transitions, says that not coincidentally, default occurrences picked up sharply in 2008 in each progressive quarter, which is a stark contrast with the ultra-low default rates of recent years.

The 2008 default tally was 125, with a quarterly distribution of 18, 20, 27, and 60 in the first through fourth quarters, respectively. Expressed as a percentage of the total issuer count, the global default rate rose to 1.69 per cent in 2008 from 0.36 per cent a year earlier. All regions experienced a visible increase, with the U.S. leading the charge at 2.41 per cent.

The investment-grade default rate rose to 0.41 per cent, its highest annual rate since 2002. Among speculative-grade rated entities only, the comparable year-end 2008 and 2007 default rates were 4.02 per cent and 0.98 per cent, respectively, in the U.S., 2.54 per cent and 0.99 per cent in Europe, and 1.96 per cent and 0.18 per cent in the emerging markets. At 3.43 per cent, the year-end 2008 global speculative-grade default rate was at its highest level since April 2004.

The study includes industrials, utilities, financial institutions, and insurance companies around the world with long-term local-currency ratings. All default rates reported are calculated on an issuer-weighted basis. Of the 5,966 corporate issuers rated globally by Standard & Poor's Ratings Services at the beginning of 2008, 15.82 per cent were downgraded at the end of the year, the highest downgrade rate since 2002. The downgrade-to-upgrade ratio moved up to a five-year high of 2.05. Moreover, the average number of notches recorded among downgrades rose in 2008 to 1.63, a pace unmatched since 2002.

"The rise in corporate casualties is not surprising, as it comes on the heels of many consecutive years of heady growth," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group.

The noteworthy deterioration of the global corporate rating distribution (and the coincident drop in the median rating) in the last five years was a visible symptom of the boom years, characteriaed by easy lending conditions, rock-bottom spreads, and a bulging rise in low-grade originations. Looked at by sector, most industries remained dominated by speculative-grade issuers as of the end of 2008 in comparison with 10 years earlier.

"We expect the current wave of defaults will restore a greater sense of equilibrium, resulting in a distribution that tips closer toward investment grade, as was the case in 2003,"  Vazza added. "This dynamic results when the volume of defaults more than compensates for the new entrants into the speculative-grade universe, either from downgrades or from originations."