S&P's Most Likely to Default in 2010 List

Even if the global economy does rebound to some extent this year, the number of companies in danger of defaulting on their credit obligations will remain high. A disproportionate number of them could come from the U.S., and more than half could be concentrated in five key industries, according to a report issued Friday by credit ratings agency Standard & Poor's.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% At the end of 2009, S&P considered 225 companies globally with combined rated debt of $214 billion being at high risk of default. Referred to as "weakest links" by the report, S&P describes these companies as entities with credit ratings of B- and lower, with either a negative outlook or being one CreditWatch with negative implications.

Being placed on the "weakest link" list is no laughing matter because a significant portion of these companies go on to default on their debt obligations. Of the 225 firms cited in the report, 151, or about two-thirds, are U.S. companies, accounting for $167 billion of the $214 billion in debt outstanding.

"Historical analysis shows that once companies qualify as weakest links, the likelihood that they will default escalates sharply in comparison with the rest of the speculative-grade segment. Therefore, it is not surprising that weakest links accounted for 103 of the 126 companies that defaulted in 2008 and 218 of the 237 defaulters in 2009," says the report, written by Diane Vazza, managing director and head of Global Fixed Income Research for S&P. "Although we expect the default rate to decline in 2010, we believe that many of the defaulters will come from the weakest links list."

Naming Names

That means well-known U.S. corporations such as Eastman Kodak (EK); casino operator Las Vegas Sands (LVS); retailer Loehmann's Holdings; food manufacturer Smithfield Foods (SFD); and airlines AMR (AMR), US Airways Group (LCC) and UAL (UAUA) are all at high risk of defaulting in 2010. Additionally, companies in media and entertainment; banking; consumer products; forest products and building materials; and the chemicals, packaging and environmental services sectors are also at elevated risk of default.

"Of the 237 defaulters in 2009, 218 were once weakest links, and 119 were from these sectors," the report says.

S&P explains that even though access to credit in the financial markets has improved, many of the companies on the weakest link list will continue to be hampered by lackluster demand that has impeded their growth. Although S&P has raised its forecast for the corporate speculative-grade default rate from 10.9% in December to a projected 6.9% in September 2010, it may already be too late for many of these companies. Sevent7-seven of them started 2009 on the weakest link list and remain on it today.
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