Corporate Defaults, Globally and in the U.S., Set a Record in 2009

Here's a stark indicator of just how bad the global credit crunch and resulting Great Recession have been: Corporate defaults globally totaled 265 in 2009. That's the most ever ever, topping even the 229 defaults recorded during the last recession in 2001. These figures are in a report issued Friday by credit ratings firm Standard & Poor's, which also says U.S. companies set a default record as well: 193, up from the previous high of 134 in 2001. At least now, with 2009 in the rear-view mirror, S&P forecasts significantly improved levels of default risk for 2010.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%Among the big names that defaulted on their debt in 2009 are General Motors, CIT Group, General Growth Properties, Harrah's Entertainment, Eddie Bauer Holdings, Pier 1 Imports and Clear Channel Communications.

Defaults totaled 36 in the emerging markets, followed by Europe with 19 and other developed regions (Canada, Japan, Australia and New Zealand) with 17. Most defaults were caused by distressed debt exchanges, missed interest or principal payments and bankruptcy-related matters.

The S&P report is authored by Diane Vazza, managing director and head of Global Fixed Income Research, who forecasts an improved picture for corporate defaults in 2010 largely due to improving conditions in financial markets.

More Defaults May Be Postponed or Averted

"The sharp decline in funding costs, the opening of the bond markets (even for low-rated issuance), and the abatement of volatility are factors that will lower refinancing costs, even for low-rated issuers," says the report. "As a result, our 12-month forward baseline projection for the U.S. corporate speculative-grade default rate is now 6.9%." Speculative-grade debt is rated BB+ or lower, and is also known as high-yield debt or junk bonds.

In September, S&P projected the U.S. corporate default rate at 10.8%, but now it believes many defaults will be postponed beyond the next 12 months or will be averted as companies find financing.

Many U.S. companies remain at sizable risk of corporate default because consumer spending hasn't yet returned to pre-recession levels. Bankruptcy attorney Edward E. Neiger, of law firm Neiger LLP in New York, says companies that rely on middle-class consumer spending are at particular risk of default.

Neiger says to watch out for jewelry merchant Zales (ZLC), and movie and video-game renter Blockbuster (BBI) as candidates for default in 2010 because they're under particular pressure from both the poor economy and competitors taking away market share. "Those companies that are catering to the middle class are going to suffer," he says, "because the middle class is not purchasing luxuries right now."

At least 2010 doesn't figure to set another default record, if S&P's forecast holds up.
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