A Standard & Poor’s report from yesterday declares that speculative-grade debt, a cornerstone of leveraged buyouts, has reached a double digit default rate for the first time this downturn.
Is it a peak? Maybe. The number of buyout-backed companies in S&P’s “Weakest Links” list, which tracks default candidates, has fallen off in recent quarters, in part because many of them have already defaulted.
But S&P doesn’t anticipate the number of defaults on speculative grade debt to peak. In fact, the ratings agency predicts the default rate will escalate to a mean forecast of 13.9% by July 2010, and as high as 18% if conditions are worse than expected.
S&P reports that the increase in default on speculative-grade debt has occurred in spite of tightening spreads on corporate bonds.
There is good news, though—new issuance has increased over the past four months.
By par amount, speculative-grade issuance through August 2009 is at $73.6 billion, more than double the $35.8 billion at this time in 2008, and investment-grade issuance is up to $602.7 billion from $537 billion during the same period. Looking at new issue counts by rating presents divergent paths. Investment-grade new issuance is down 10% versus this time in 2008, while speculative-grade new issuance is up considerably, by 82%.
You can view the entire study here: