16 April 2013

Each year, Standard and Poor’s publishes a report covering credit events from the previous year; it is one of the most widely read reports among sophisticated global institutions with large fixed income portfolios.

The S&P Annual Global Corporate Default and Ratings Transition Study provides tremendous insight into (you guessed it) defaults on rated and unrated bonds all over the world, as well as a panorama of ratings transitions (upgrades and downgrades).

The 2012 edition was released late March this year and there are a number of compelling statistics that can help frame your bond portfolio moving forward. Let Firstline help you construct a portfolio that includes investment grade Latin American corporate bonds, which offer some of the best yields along with default and credit risks similar to their American or European counterparts.


Interestingly enough, in 2012 defaults increased not only in number, but also in the dollar value compared to the previous year. There were 84 defaults in 2012, covering debt with a face value of 87 billion—compared to 53 defaults worth 84 billion in 2011. 

The majority of defaults where in the CCC to C rating range, where 26.62% of issues defaulted in 2012. There were zero defaults in investment grade bonds (rated between BBB and AAA). BB-rated bonds registered default rates of 0.29% while 1.5% of B-rated bonds defaulted during the same period.

The latest figure on cumulative default rates is instructive; over 50% of all CCC or lower debt ever issued has defaulted, while the lowest category of investment grade (BBB) has yet to scrape a 10% cumulative default rate.

That being said, defaults on speculative or non-investment grade credits came in at 2.2%, well below their 32 year average of 4.2%. This is reflective of a larger distribution of higher end speculative grade bonds (BB+ to B-) versus the lower end (CCC+ to D).

No single industry had a default rate above 5% but Leisure/Media, Transportation, Energy and Natural Resources, and Utilities were well above their long term average.

Utilities in particular had a default rate that was more than double its historical rate of less than 0.5%. The industry with the lowest default rate was real estate, which had zero defaults, with insurance in second.

Overall stability deteriorated somewhat, largely as a result of events in Europe and an unsteady global recovery. 8.2% of issuers were upgraded, while 11.76% were downgraded.




The U.S. saw a marked decline in the dollar value of defaults, at 39 billion down from 74 billion in 2011. However, in raw numbers, there were 47 defaults compared to 39 in 2011. The overall default rate for U.S. issuers was 2.6%, compared to the long term average of 4.5%. Almost nine out of ten (85%) defaults were from non-investment grade issuers.

Almost a third (29%) of issuers rated CCC or worse defaulted in 2012, above the historical average. Overall non investment grade default rate was 2.59%, compared to 2.01% the previous year. There were no investment grade defaults, while there were 39 non investment grade defaults.

The U.S. is home to most speculative / non-investment grade issuers, and in fact, 52.6% of U.S. issuers are non-investment grade. Additionally, 54% of all non-investment grade issuers globally are based in the U.S.

In stability terms, 75% of issuers had no change in rating (versus 70% in 2011). Upgrades in the U.S. also outpaced downgrades for the third consecutive year; 8.74% of issuers were upgraded, while 8.16% were downgraded.



Emerging Markets defaults increased the most out of all categories, from 4 defaults in 2011 to 25 in 2012—although to be fair, the EM category includes issuers from 84 different countries. Around 30% of all global defaults were in emerging market countries.

This is only the fourth time in the past 16 years that the emerging markets default rate is higher than the global default rate. The previous three times (1998, 1999, and 2002) coincided with sovereign stress periods in emerging markets. These were the Asian financial crisis and the sovereign crisis in Russia in 1998 and the default of Argentina in 2001.

 The dollar value of defaults in 2012 for EM was 22 billion. This is an enormous increase from the 2011 dollar value of defaults, which was only 180 million. BTA Bank J.S.C., a Kazakh bank, was the single largest defaulter globally, with 10 billion.

There were no investment grade defaults in emerging markets, in line with the global norm, and also below the EM historical average of 0.21%; non-investment grade defaults were 2.56%, below the historical average of 3.59%. Cumulative default profiles for EM mirror that of global issuers, although interestingly, there is actually a lower default rate for non-investment grade names.

In terms of industries or sectors, Brazilian utilities had the highest default rate in 2012, at 3%. This is also reflected in the regional breakdown, where 11 out of the 25 EM defaulters were based. Eastern Europe, the Middle East, and Africa (EEMEA) was second, with 9 defaults.

Additionally, credit stability deteriorated, with 10.6% of issuers in emerging markets having been downgraded in 2012. This is an interesting contrast to the price performance of EM bonds, which have outperformed most other fixed income asset classes. Could it be that there is a bubble? Or are EM corporate issuers simply becoming more creditworthy?


Based on data from last year, it seems that credit has improved for most global issuers, with the U.S. showing particular signs of robustness. This robustness is mirrored in equities as well, and has led to record highs in the stock market to match record performances and low yields in bonds.

However, questions remain regarding the strength of the global economy—particular the consumer. Unemployment is still quite high, and wages remain depressed in inflation-adjusted terms as well as in proportion to record high corporate profits. If interest rates go up quickly as a result of growth, along with inflation and increased hiring, the U.S. could find itself in a Catch 22 situation.

Profit margins could take a tumble, squeezing creditworthiness and leading to higher defaults. Additionally, Europe will continue to be a drag on growth and the political establishment on the continent has had an uneven, last minute approach to dealing with problems.
Nevertheless, there are many high quality credits, especially in the Latin American corporate sector, which offer excellent yields compared to other options, while also tapping into robust (and growing balance sheets). Firstline has spent the last few years developing expertise in this area and we can help build a portfolio that suits your risk tolerance and needs.

In the next installment we will tackle European corporate and global sovereign default rates.

However, in the meantime, and for more information, please contact us at

Michael J Cooper
Trading / Investment Strategist
Firstline Securities Limited


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