DealZone

The rising and falling default rate

Stock photo of Javier Ramirez is seen through the crystal ball while practicing before a show in the national jugglers encounter in Concepcion, 500 km from Santiago. Picture taken March 12, 2004.  	 REUTERS/STR NewRating agencies Moody’s and S&P regularly publish figures on how many companies have defaulted on their debt, and the numbers are rising fast.

S&P’s latest report, which came out on Thursday, shows the global speculative-grade bond default rate increased to 8.58% in July, up slightly on June, and a massive hike on the record low of 0.79% hit in November 2007.

It is less clear what will happen next. Earlier this year the agencies predicted defaults amongst speculative grade borrowers could reach 20 percent — a huge increase — but now agencies have rowed back and are painting a slightly less bleak picture.

S&P’s new report says the number of “weakest links” — companies with low (B- or worse) ratings on review for a downgrade or with a negative outlook — has declined. This, the agency says, is because the increased number of defaults has knocked out many of these weak credits.

A sliver of silver lining around this grey cloud is that the rate of companies falling into weakest-link territory is lower than the number of companies defaulting, which may suggest the default rate may ease sooner rather than later.

Nycomed crafts a buyout, 2009-style

Nycomed, the Swiss drug company, already has 4 billion euros or so of net debt and some pretty junky single-B credit ratings. But that’s not deterring the private-equity owned outfit from plotting a bid for the drugs business of Belgium’s Solvay, even in these leverage-phobic times. As I wrote earlier:

“Switzerland’s Nycomed plans to draw on buoyant junk bond markets and new cash from its private-equity owners to fund a buyout of Solvay’s drugs unit, people familiar with the matter said.

“Such a structure would allow Nycomed — which already has billions of euros of syndicated loans — to bypass the moribund leveraged loan market and would create a group with some 6 billion euros ($8.6 billion) in yearly sales.”