The most notable revelation is S&P’s prediction for corporate default rates. I’ve heard predictions of anywhere from 5% to 8%. Yesterday I even heard 12% (!), but S&P’s baseline forecast for a year from now for defaults of speculative grade debt is 7.6%. Right now that rate is at 4.4%. Don’t forget that defaults were at a 25-year low of .97% in December.
In the third quarter, more companies defaulted on loans than in all of 2007. It was the busiest default period since 2003. The report concludes that structured finance, which outperformed corporate credit from 1995 to 2007, has now taken a back seat, largely because of mortgage-backed securities and CDOs. Corporate credit has declined in performance 13% year-to-date, while structured finance has declined 289%.
The global breakdown is pretty alarming as well, with 24 of the 28 defaults coming form U.S. companies, two from Europe and the other two from Canada and Hong Kong. From the report:
Through the third quarter of 2008, there were 66 defaults, affecting rated debt worth $218.2 billion. During the same period in 2007, there were 16 defaults on rated debt worth $5.7 billion. After hitting record lows in 2007, the pace of defaults picked up markedly. If the pace of defaults set this year to date is maintained through the remainder of the year, 2008 would have the largest number of defaults (88) since 2003.
And sector-wise, the breakdown is:
Of the total, seven were financial institutions, four were from the consumer products sector, three each from leisure time/media and the forest and building products/homebuilders sectors, two from both transportation and real estate, and one each from insurance, health care/chemicals, and aerospace/automotive/capital goods/metal.