US Corporate Defaults Already Higher Than 2008 Total

Excerpted from Second-Quarter U.S. Nonfinancial Corporate Defaults Exceeded Those For All Of 2008

A record total of 82 US nonfinancial companies defaulted during the second quarter, led by 16 in the media and entertainment sector, 15 in autos, and 15 in natural resources. These 82 defaults accounted for a collective $254 billion in outstanding debt, dramatically overshadowing the 30 defaults totaling $52.9 billion in debt during the first quarter. By contrast, for all of 2008, 69 issuers defaulted on about $102 billion in debt.

Of the second-quarter defaults, the largest portion (about 42%) resulted from distressed exchanges, 28% from missed payments, and 27% from bankruptcies. Distressed exchanges occur when a borrower offers creditors securities or cash in exchange for their debt claim that are worth less than the nominal present value of their original claim.

Standard & Poor’s Global Fixed Income Research (GFIR) expects corporate defaults to be concentrated in the second and third quarters of 2009. GFIR forecasts U.S. speculative-grade nonfinancial corporate defaults to peak in the first quarter of 2010, and then inch lower to 13.9% by mid-2010. (See U.S. Corporate Default Rate Expected To Inch Lower To 13.9%, published July 23, 2009.) This reflects our expectation of continued weak economic conditions and tight credit markets, although we do expect the credit markets to continue to ease somewhat through year-end.

However, in the near term, stricter lending practices could remain problematic for speculative-grade borrowers, which accounted for the significant rise in distressed exchange offers.

Other major default triggers, such as debt refunding, will continue to be a concern as much of the debt rated ‘B-’ or lower that was issued in the past few years reaches maturity.

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