Global corporate defaults at all-time low in 2005: S&P

Mumbai:
02 February 2006

Mumbai: Standard & Poor's Ratings Services has released a report indicating that the global corporate default rate for speculative-grade and investment-grade rated entities remained near all-time lows in 2005, reaching 0.55 per cent at the end of the year from 0.73 per cent in 2004 on an issuer-weighted basis.

The report, titled Annual 2005 Global Corporate Default Study And Rating Transitions, says that globally, speculative-grade default rates have remained below the long-term (1981-2005) average of 4.65 per cent for 23 consecutive months.

In 2005, the total number of defaults (37) was the lowest recorded since 1997, but the global default rate is expected to edge up from its trough in 2006. A spate of high-profile defaults in the third and fourth quarters of 2005 raised the total amount of debt affected to US$42.5 billion, the largest volume since 2003.

"Analysis of the transition rates over the four quarters ended December 2005 suggests that ratings behavior continues to exhibit consistency with long-term trends, showing a clear negative correlation between credit quality and default probability," noted Diane Vazza, head of Standard & Poor's global fixed income research group. "Not surprisingly, low defaults coincided with high recovery rates, with ultimate recoveries in 2005 posting their highest rates in 10 years."

The report also examines how Gini ratios displayed a high degree of ratings accuracy in terms of the historical ability of ratings to predict default. Among corporate entities rated by Standard & Poor's, an average one-year Gini coefficient of 84 per cent was recorded; three-year 78 per cent; five-year 75 per cent; and seven-year 72 per cent.

Corporate rating behavior was consistent with the improving trends noted in other asset classes, notably global structured finance.