The global speculative-grade corporate bond issuer default rate fell from 1.9% in 2005 to 1.7% in 2006, marking the fifth consecutive annual decline and its lowest year-end level since 1996, Moody’s Investors Service reports.


The rating agency said that relatively low interest rates, tight high-yield spreads, and robust debt issuance helped to keep the default rate within a narrow band over the course of 2006, not exceeding 1.9% or falling below 1.6% during the year. The default rate for speculative-grade corporate bond issuers has averaged 5% per year and has run as high as 12.7% and as low as 0.4% since 1980, it reported.

“The year 2006 was an unexpectedly strong one for the riskiest bond issuers,” said David Hamilton, Moody’s director of corporate default research. “However, the credit quality pendulum appears set to swing the opposite direction in 2007.”

Moody’s forecasting model for its global speculative-grade corporate bond issuer default rate predicts that the pace of defaults will rise to 2.6% by the end of 2007.

“Market liquidity was a big factor keeping the default rate down in 2006, but we do not believe the rules of the game have changed,” said Hamilton. “The surge in risky debt issuance, particularly single-B and below, will translate into higher default rates in 2007 and 2008. The consensus view is also for slower economic growth in 2007, placing additional upward pressure on corporate defaults.”

Worldwide in 2006, a total of 27 Moody’s-rated corporate bond issuers defaulted on US$7.8 billion of bonds compared with 34 issuers defaulting on US$29 billion in 2005. Dana Corporation, together with Dana Credit Corporation, was the year’s largest default at approximately US$1.9 billion.

The sharp drop in default volumes resulted in an equally sharp decline in the default rate measured on a dollar volume basis. Moody’s dollar-volume based global speculative-grade corporate bond default rate fell from 3.8% in 2005 to 1.1% in 2006. Much of the drop, however, reflects the fact that several large defaults in the airlines and telecommunications sectors in 2005 passed out of the trailing 12-month calculation, it said.

Corporate defaults were concentrated in the U.S. in 2006, where 21 bond issuers defaulted on a total of US$6.4 billion in 2006. Four corporate bond issuers defaulted on US$1.2 billion in Europe, and two bond issuers based in South America defaulted on a total of US$0.2 billion.

The troubled automobile parts sector experienced the highest volume of defaults in 2006. Rated bond issuers in the automobile parts sector defaulted on a total of US$2.8 billion of bonds — more than one third of the total defaulted bond volume for all of 2006.