Credit quality improving in February, defaults delayed to 2008

Troubled companies, where probability of default is greater than 1%, made up 5.8% of the global public company universe in February this year, compared with 6.1% in January and 7.3% in December last year. The index has only been lower from March to May 2006 when it hit 5.4%, the lowest point for the past 17 years.

However, these figures do not reflect recent market turbulence. Warren Sherman, chief operating officer at Kamakura, said: “The continued improvement in credit quality in February may be short-lived, as it doesn't yet fully reflect the recent 400-point drop in the Dow Jones index nor the meltdown in the subprime mortgage lending market in the last two business days.” The index covers more than 17,000 public companies in 29 countries using Kamakura's credit models.

UK accountancy firm Ernst & Young has also predicted that the corporate default rate will remain low until mid-2008, as continuing liquidity has enabled companies to refinance their way out of recent difficulties.

Alan Bloom, head of corporate restructuring, said: “We are seeing companies being propped up that we would not imagine being propped up. People are rushing to rescue companies. The annual default rate on mezzanine debt would have exceeded 2.5% in the fourth quarter of 2006 - against an actual figure of just less than 2% - if companies had not benefited from easy refinancing or relaxed banking covenants.”

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