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Report Sees Global Corporate Default Rates Continuing to Decline in Second Quarter

NEW YORK (Standard & Poor's) July 22, 2004--Global corporate default rates for speculative-grade and investment-grade rated entities declined visibly in the second quarter of 2004 to an annualized rate of 0.62% from 1.84% in 2003. If the pace of the first half is maintained for the rest of the year, 2004 will see the lowest number of recorded defaults since 1997, attesting to sanguine default expectations in the near term, with the global default rate continuing to decline in 2004. On a 12-month rolling basis, global speculative grade default rates slumped to 2.57% at the end of June from 2.88% in May. The current rate is now well below the long-term (1981-2003) average of 5.27%. In the U.S., results from a newly developed proprietary default forecast model indicate that U.S. speculative-grade default rates will rise slightly from their second-quarter low but will remain lower than the average of the last four quarters. Concerns for a more material increase in defaults in two to
three years remain. Analysis of the transition rates over the four quarters ended June 2004 suggests that ratings behavior continues to exhibit consistency with long-term trends, showing a clear negative correlation between credit quality and default probability.

"A quantitative measure of ratings performance--the historical ability of ratings to predict default--of corporate entities rated by Standard & Poor's shows a one-year Gini coefficient of 0.86; the three-year 0.80; the five-year 0.77; and the seven-year 0.75. If corporate rating rank orderings only randomly approximated default risk, the Gini coefficient would be '0'. On the other hand, if corporate ratings were perfectly rank-ordered so that all defaults occurred only among the lowest-rated entities, the curve would capture all of the area above the diagonal on the graph and its Gini coefficient would be '1'," explained Diane Vazza, head of Standard & Poor's Global Fixed Income Research.

Members of the media only can obtain a copy of the full report, "S&P Quarterly Default Update & Rating Transitions," by contacting Marc Eiger. The report is listed under Global Fixed Income Research. If you have not previously registered with the site, you will need to do so to access this material. Registration requires minimal information and is free.