Global default rates sharply higher in 2008: S&P

The majority at 65 were domiciled in the United States, followed by two each from Canada, Hong Kong and Mexico, and one each from France, Germany, Iceland and Britain, the agency said in a note.

U.S. companies also account for the majority of the list of "weakest links," or issuers with a rating of "B-minus" or lower, who have either a negative outlook or are on review for a potential downgrade, meaning they are more at risk of default.

S&P's "B-minus" rating is six notches into speculative, or 'junk' status.

A full 140 out of 181 weakest links are U.S. companies. The combined rated debt of all 181 totals $388.52 billion.

"In 2008, defaults have increased significantly in the U.S., but remain scarce elsewhere," said S&P managing director Diane Vazza.

The 12-month trailing global corporate speculative-grade bond default rate rose to 2.04 percent in September from 1.84 percent in August, but held below the long-term average of 4.35 percent for 56 consecutive months. The long-term average is calculated on the period from 1981 to 2007.

In contrast, the U.S. speculative-grade default rate rose to 2.68 percent in September from 2.44 percent in August, climbing for a ninth consecutive month.

The rate had hit a 25-year low of 0.97 percent at the end of 2007.

"Volatility in the financial markets has pushed the U.S. speculative-grade spread past the 1,000-basis point mark as of October 15, from 919 bps at the end of September and 787 bps at the end of August," said Vazza.

"Continued uncertainty in the financial markets, a weakening economic environment, and higher default expectations in the next few quarters should keep high-yield spreads elevated."

In Europe, the default rate fell to 0.99 percent in September from 1 percent in August, while the emerging market default rate rose to 0.17 percent in September from zero in August.

S&P is expecting the U.S. speculative-grade default rate to escalate to a mean forecast of 7.6 percent in the next 12 months through September 2009, said Vazza.

The estimate implies an average of 10.4 defaults a month, up from 6.7 a month on average in the first nine months of 2008.

On a sectoral basis, U.S. default rates are concentrated in finance and real estate. But consumer discretionary sectors such as leisure/media, consumer/service and retail/restaurants are vulnerable to cyclical trends in the economy.

The high concentration of weakest links and distressed credits -- defined at those trading at 1,000 basis points over Treasuries -- in those sectors suggests a continued increase in defaults, said the agency.

(Reporting by Ciara Linnane; Editing by Chizu Nomiyama)