Corporate defaults continuing to rise

While the financial markets are upbeat about the rapid improvement in financial asset values, investor demand and secondary market liquidity, the real economy is still dealing with the fall-out from the GFC. Standard & Poor's latest Global Corporate Default Update drives home this reality.

S&P's year to date tally of corporate defaulters around the world comes to 233, almost three times the 77 recorded at the same time last year. Included in this year's default tally is one confidential Australian corporate.

The identity of the Australian defaulter is confidential because its credit rating was not publicly disclosed at the request of the company. However, S&P does reveal the timing of the default - mid-January - and the industry sector of the company - home building and real estate. Any guesses?

Not surprisingly the US has seen the greatest number of defaults year to date at 171, followed by 34 in the emerging markets, 15 in Europe and 13 in other developed countries, including Australia.

S&P attributes the precipitously high rate of defaults to the pronounced decline in economic fundamentals and earnings prospects as well as the effective halting in lending to lower-rated speculative borrowers. A record high proportion of speculative grade issuers, the highest volume of low-rated issuance since 2003 and the seasoning of much of the debt rated 'B-' or lower issued in recent years, has exacerbated the situation.

S&P is now forecasting that its 12 month trailing US speculative grade corporate default rate will reach 13.9 per cent by mid 2010. The pessimistic forecast is 18 per cent.