Standard Chartered Says Asian Spreads to Widen on Default Rates

Nov. 25 (Bloomberg) -- The extra yield investors demand to own Asian corporate dollar bonds instead of government debt will increase in the “imminent future” as they realize default risk is greater than expected, according to Standard Chartered Plc.

After “discounting Armageddon” in the wake of Lehman Brothers Holdings Inc.’s bankruptcy, when so-called spreads implied a 60 percent default rate with no recovery, investors are now “discounting perfection,” Vijay Chander, head of credit strategy for the London-based bank, said at the Asian Bond Markets Summit in Singapore yesterday.

“This optimism is somewhat unjustified,” Chander said. “For the first time in about five years you’ve had a cross-over where actual default rates are quite a bit higher than the default rates implied by credit spreads.”

Five companies defaulted globally last week, bringing the tally this year to 247, nearly triple the 87 defaults of the same period last year and the most since Standard & Poor’s began collecting such data in 1981, the ratings company said on Nov. 20. Companies’ ability to pay their debt was crimped after Lehman failed in September 2008, shuttering credit markets and causing investors to flee all but the safest government debt.

Spreads over similar-maturity U.S. Treasuries for Asian investment-grade corporate dollar bonds narrowed to 2.92 percentage points on Nov. 24 from 7.62 percentage points on Dec. 5, JPMorgan Chase & Co. indexes show. They have widened from a year-low of 2.89 percentage points on Oct. 26.

While Asian spreads imply a default rate of about 4.7 percent, the actual rate is about 9 percent, Chander said.

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