Nov 15 - Standard & Poor's Global Fixed Income Research expects the U.S.
corporate trailing 12-month speculative-grade default rate to increase to 3.7%
by September 2013, from 3% as of September 2012, said an article published today
titled "U.S. Corporate Default Rate Forecasted To Rise To 3.7% By Third-Quarter
"Our baseline projection is lower than the long-term (1981-2011) average of
4.5%," said Diane Vazza, head of Standard & Poor's Global Fixed Income
Research. "A total of 58 issuers would need to default in the 12 months ending
September 2013 to reach this projection." By contrast, 46 speculative-grade
entities defaulted in the 12 months ended September 2012. Our baseline
forecast is partly based on the assumptions that U.S. economic growth will
continue to be slow and the unemployment rate will remain elevated.
The Bureau of Economic Analysis' advanced estimate for real GDP growth in
third-quarter 2012 was 2.0%, following a 1.3% growth in the second quarter.
"We expect real GDP growth of 2.1% for full-year 2012 and 2.3% in 2013," said
Ms. Vazza. "In addition, the unemployment rate remains elevated, at 7.9% as of
October 2012, and we expect it to decline modestly to about 7.5% by
Capital inflows into the credit markets have been healthy in 2012, which
helped to keep the count of default occurrences relatively low. The Federal
Reserve has also kept interest rates low for an extended period of time, and
it has pledged to continue its quantitative easing until the labor market
improves. Nevertheless, the uncertainty that surrounds the possibility of U.S.
lawmakers not reaching an agreement regarding the "fiscal cliff" continues to
threaten the U.S. recovery and makes investors nervous, and for good reason.
Various market observers estimate that the impact of going over the fiscal
cliff could result in a fiscal contraction of 3%-5% of GDP. In essence, it
could send the U.S. economy back into a recession.
In Europe, the sovereign crisis continues to weigh on investor confidence.
Monetary policy appears to be in favor of providing the necessary assistance
to certain countries, but it remains to be seen if the measures that the
region is trying to implement will be effective and sufficient to calm
investor concerns both locally and globally. As we have witnessed in the past,
an escalation in Europe's sovereign crisis could easily temper or reverse
investor appetite for corporate bonds.
In addition to our baseline projection, we forecast the default rate in our
optimistic and pessimistic scenarios. Under our optimistic default rate
forecast, we would expect the default rate to decline to 2.5% by September
2013 (or 39 defaults during the next 12 months). Under the pessimistic
scenario, we expect the default rate to rise to 5.7% (or 90 defaults during
the next 12 months). We base our forecasts on quantitative and qualitative
factors, including, but not limited to, Standard & Poor's proprietary default
model for the U.S. corporate speculative-grade bond market. We update our
outlook for the U.S. issuer-based corporate speculative-grade default rate
each quarter after analyzing the latest economic data and expectations.
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