S&P predicts 20pc default rate for high yield firms in 2009

A fifth of European speculative grade companies could default by 2010, according to a report released by Standard and Poor's late last year. The rating agency predicted that the deteriorating economic outlook and illiquid market conditions of 2008 would continue throughout 2009 and beyond.

"Investors should be braced for a record number of defaults among European companies ... caused by plummeting confidence in the banking sector, the virtual closure of the corporate bond market in September, and the non-existent high yield market," said Blaise Ganguin, S&P's chief credit officer for Europe.

Turbulent market conditions could push the cumulative default rate on speculative grade issuers above 20%, and between 60 and 75 of S&P's 715 rated companies in the speculative grade category could default in 2009, putting EUR20-EUR25 billion at risk, the report forecasted. As of December 15, 18 public companies in western Europe had been rated by S&P as very vulnerable to default - so-called 'weakest links'.

Such a large number of defaults will likely put pressure on the credit default swap market. "As defaults rise, there are going to be more executions of these contracts and resultantly there will be a lot of money changing hands from sellers to buyers of default protection," explained Andreas Zsiga, a credit analyst at S&P and a co-author of the report.