US leads in bond defaults: S&P study

Venkatachari Jagannathan
06 April 2002

Chennai: The United States of America, with 33 upgrades and 179 downgrades, accounted for more than half of all global rating actions during the first quarter of this year. The next highest tally is Europe (three upgrades and 55 downgrades) followed by Latin America (12 upgrades and 42 downgrades). Argentina was the single worst hit country, with zero upgrade and 36 downgrades.

According to Standard and Poors (S&P) globally 304 downgrades and 61 upgrades affected rated bonds worth $420.9 billion and $48.2 billion, respectively. At the end of the first quarter, 74 defaults on rated bond issuers were recorded globally, with obligations amounting to $44.9 billion.

The US led the charge with 36 rated bond issuers defaulting on $19.7 billion, followed by Latin America with 26 defaults on $10.7 billion (all but one of those defaults is attributable to Argentina). The quicker-than-anticipated economic rebound in the US possibly led to US defaults peaking in the first quarter.

Defaults in the European Union (EU) should peak in the second quarter, as evidenced by the continued difficulties surfacing from the European telecommunications sector, predicts S&P. Given the risks associated with the strength of the US recovery as well as the threat of rising energy prices due to the tension in the Middle East, no quick improvement is foreseen. Instead, any deceleration in defaults will be moderate at best.

But the overall global credit quality improved slightly at the end of the first quarter. S&P says the global credit ratio (ratio of downgrades per upgrade) edged down to 5.0 compared with 7.0 at the end of Q4 2001 and 5.7 in Q3 2001.

The trend was not uniformly spread across all regions; the US, Canada, and Latin America recorded visible improvements in credit quality, but Europe and the Asia-Pacific region showed deterioration compared with a quarter earlier the latter affected by the impact of Japan and Australia.

Volatility in US industrial credit spreads has abated considerably this year in comparison with a year earlier. Most of this reduction is attributable to the speculative-grade sector, where spreads tightened from a peak of 970 basis points (bps) on 4 October 2001, to 600 bps on 2 April 2002. Further reduction in speculative-grade credit spreads is anticipated.