Canada is following the global trend of falling default rates and improving credit quality, says Moody’s Investors Service.

Moody’s said in a report that the default rate for Canadian speculative-grade corporate bond issuers fell to 1.8% in 2003 from 7.7% in 2002.

In 2003, a total of three Moody’s-rated corporate issuers defaulted on a total of $1.8 billion of bonds, down from seven defaults totaling over $14 billion in 2002. The year 2002 marked a record high in the total Canadian dollar volume of defaulted bonds, and the number of Canadian corporate issuers defaulting peaked in the year 2000 at nine, when the speculative-grade default rate also peaked at 11.6%.

“The increase in Canadian defaults was the result of a growing and diversifying capital market, and the surge of debt issuance in the late 1990s – particularly in risky new economy sectors,” said David Hamilton, director of corporate default research and author of the rating service’s second-annual Canadian corporate bond default study. “In fact, the rise in default rates for Canadian corporate issuers over 1998-2002 mirrors that of the U.S. over the same time period.”

The study documents the historical default and recovery rates of Canadian corporate bond issuers since 1989, when debt issuance and the number of issuers obtaining credit ratings accelerated. The report also demonstrates the similarity of default rates by rating and recovery rates between Canada and the U.S.

Reflecting the heightened global risk of default in the past 15 years, a total of 61 Canadian corporate issuers defaulted on $31 billion of bonds between 1989 and 2003, it reports. The largest Canadian defaulter was AT&T Canada, which defaulted on more than $4.6 billion in September 2002. Some 10 of the defaulting issuers between 1989 and 2003 had bonds outstanding that totaled over $1 billion each.

Of the 61 defaulting issuers, 38 carried a Moody’s rating within a year of the default date. Nearly two-thirds of the rated default total occurred during the 2000-2002 period. In the year 2000 alone, nine rated issuers defaulted on a total of $4.5 billion. In 2002, six rated issuers defaulted on $14.2 billion of bonds.

Bonds issued by industrial-sector companies accounted for nearly 40% of the 61 defaulting issuers over the 15-year sampling period beginning in 1989, when Canadian corporate debt issuance began to accelerate. The two areas that experienced the greatest number of defaults, metals and mining and forest products and paper, accounted for 10 and six defaults, respectively.

“As Moody’s observed in the U.S. and Europe, defaults in the telecommunications and technology sector pushed up the overall Canadian default rate considerably,” Hamilton said. “Although telecom firms were only 17% of the total number of defaulting Canadian issuers between 1989 and 2003, they represented 56% of the total default volume.”

During the period covered, only three Canadian corporate issuers held an investment-grade rating within a year of default: AT&T Canada, followed by Teleglobe Inc., $1.9 billion, and Laidlaw Inc., $3 billion. Notably, no Canadian issuers rated Aaa, Aa, or A have ever defaulted within five years of holding those ratings.

Moody’s study also finds that, although the average rating one year before default for Canadian issuers is lower than their U.S. counterparts’, average default rates by rating category for the two countries are very similar. The average default rate for all rated Canadian issuers between 1989 and 2003 increases from 1.8% at a one-year holding period to 8.2% at five-years, which is similar to those of the U.S. for the same time period.