The debt crisis in Argentina and continued pain in the telecommunications sector resulted in a record number of defaults on corporate debt in the first quarter of 2002.
Optimistically, with Argentina's defaults expected to decline, and with the global economy seemingly getting back on its feet, default rates have probably peaked and should begin to decline in the second half of the year, according to report released Thursday by Standard & Poor's.
"The first quarter of 2002 was unique in that more than half of the rated companies from Argentina defaulted. This came on top of global default rates that were already very high, creating a temporary spike," Standard & Poor's wrote in its report. "As the Argentine defaults were a one-time event, Standard & Poor's does not expect to see a repeat of the first quarter's exceedingly high rate. Taking Argentina into account, it is safe to say that defaults peaked in the first quarter of 2002."
The number of companies defaulting reached a record 94 in the first quarter, far exceeding the previous high of 59 defaulters in the fourth quarter of last year. But the total amount of debt that companies defaulted on was lower than the previous record and slightly below fourth-quarter levels. Companies defaulted on a total of $32.4 billion of rated corporate bonds in the first quarter compared with $33.6 billion in the fourth quarter and the previous record of $36.9 billion for the first quarter of last year.
Argentina's debt crisis and resulting currency devaluation contributed significantly to the record number of defaults. Argentine debtors accounted for 38 of those defaulting, and $1.5 billion of rated debt. For all corporate debt issuers globally, the default rate reached 1.49% in the first quarter. Excluding Argentina, the rate was 0.81%. The previous high of 0.91% set in the first quarter of 1991.
Otherwise, defaults were concentrated in the telecommunications sector, with 17 non-Argentine telecommunications companies defaulting, including
. The capital goods and consumer sectors had 13 and nine defaults, respectively, while the rest were dispersed broadly across all industries.
joined Global Crossing on the list of high-profile defaults.
The default rate for issuers of junk bonds reached its highest level ever in the first quarter, when 4.11% of high-yield debt issuers couldn't come through with their payments.
Even without more Argentine defaults, Standard & Poor's expects overall credit quality to remain weak in the second quarter, with default rates at about 2% for speculative grade issuers. By the end of the year, the annual rate of default is expected to exceed that of 2001, when it reached a
record mark, with 211 defaults on $115.4 billion in debt.
Standard & Poor's expects default rates to improve in the latter half of this year and beyond. "In 2003 and 2004 significant improvements in the default rate are likely as the global economy strengthens and the quality of issuers continues to improve," the report stated.
The outlook for global corporate defaults hasn't changed much from the fourth quarter. At that time, industry experts said it had reached or was nearing its peak and would probably begin to decline by the summer of 2002.