Defaults, already on a steep climb before September 11, will now be very close to the 1991 all-time peak according to Standard & Poor’s third-quarter default study published today, causing Standard & Poor’s to revise its default projections for the year.

For the last quarter, Standard & Poor’s had forecast 2001 default rates of 3.6% for all issuers, and of 8.6% for speculative graders. It now expects 200-plus defaults for the year and overall default rates of 3.8%, and high-yield rates of 9.4%. Investment-grade rates are expected to be 0.48%, which would be, by far, the worst ever. In dollar terms, this represents approximately US$100 billion, more than double the US$42.3 billion of 2000. Even after allowing for inflation, this will be the largest defaulted amount.

“The U.S. economy is clearly in a recession. Although Standard & Poor’s expects it to be relatively mild and end in early 2002, the risk of a longer and deeper downturn is high,” commented David Wyss, Standard & Poor’s chief economist.

“In looking forward to 2002, it seems certain that default rates will remain high,” says David Keisman, managing director at S&P’s Risk Solutions. “The current flight to quality, evidenced by the widening of spreads, will make it difficult for stressed obligors to roll over their debts when they come due. Coupled with the tightening of credit by commercial banks in the last few quarters, many companies in financial difficulties will see their funding sources dry up and be pushed over the brink.”

All told, 50 companies defaulted in the third quarter, on US$20.4 billion worth of debt, with telecoms continuing to be hit very hard. Re-enacting its dismal performance of the year’s first half, the sector contributed 20% of the third quarter’s failures. As to the remaining 80%, no discernible concentration was observed in any one sector. Geographically, 44 of the defaulted companies (88%) were located in the U.S., two in the U.K., and one each in Argentina, Canada, Mexico and Norway.