Sunday, October 14, 2007

Speculative Grade Default Rates

by Calculated Risk on 10/14/2007 07:16:00 PM

From Reuters: Global defaults to reach 4.5-5.5 pct by 08-Barclays

Tighter bank lending standards and slowing economic growth could push global speculative-grade default rates as high as 5.5 percent by mid-2008, up from 1.48 percent currently, Barclays Capital said on Friday.

"When you do get a tightening of lending standards, you do certainly get a slowdown in the economy and that in turn starts to put pressure on corporates (corporate bonds)," Robert McAdie, Barclays Capital's global head of credit strategy, said on a Barclay's conference call.

If tight bank lending conditions persist, the default rate in the United States will likely rise to 6.9 percent from 1.5 percent currently, and in Europe to 7.75 percent, up from 2.9 percent, McAdie said. The global rate will likely reach 4.5 to 5.5 percent, he said.
Speculative Grade Default RatesClick on graph for larger image.

To put these numbers into perspective, this graph shows the U.S. speculative grade default rates from 1990 through 2005. The rate fell even lower in 2006 and is currently around 1.3 percent.

Others see the default rate staying near record low levels:
"Barring an outright recession, we do not expect a material rise in the default rate over 2008," said Daniel Lamy, a credit strategist at JP Morgan, in a note to clients. "We could be looking at defaults in the region of 1.5 percent again next year."
For the housing market, defaults were very low for several years as homeowners in trouble could either sell their homes or refinance at a lower rate. The same has been true for companies in trouble. But now, with rising rates for speculative grade bonds, it will become more difficult for these companies to obtain additional financing, and the default rate will probably rise.