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Speculative grade corporates: sunny spells, but clouds on the horizon

Sub-investment grade companies will continue to improve in credit quality into 2004, according to a report by Standard & Poor's, although a rush of recent bond issues could cause problems in two to three years time.

The rating agency's latest review of speculative grade defaults shows that the global default rate fell to 1.64% in September, down from 1.69% in August, and is expected to drift still lower in 2004. The rate has now remained below the average of the past two decades, of 5.27%, for the past 11 months.

The rate in the US is expected to rise slightly in the coming months, but the forecast for the next three quarters is still only 2.6%, far below last year's average of 4%.

Standard & Poor's puts the improved credit quality of speculative grade corporates ? those with a rating below BBB- on its scale ? down to ?expectations for stronger economic strength, relatively favourable financing conditions and healthy corporate profitability?.

But the agency does have concerns over a recent increase in low grade bond issuance. In the US 40.8% of new bond issues in the first nine months of 2004 were rated B- or lower, compared to 31% in 2003.

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