The European speculative-grade default rate ended November at 1.9%, up from 1.5% at end-October and significantly higher than the 0.5% at end-September, reports Moody’s Investors Service.

The rating agency reported that at the end of November, Moody’s European speculative-grade default rate was roughly 80% higher than its level at end-January 2006.

According to Andrea Zazzarelli, associate director of Corporate Default Research in Moody’s London-based Credit Policy team, “The pickup in defaults that we have witnessed over the past three months goes hand in hand with the polarization of credit quality in the speculative-grade segment across the Europe, Middle East and Africa region.”

Zazzarelli noted that at the top end of the junk spectrum credit quality has been improving, as almost 80% of the speculative-grade upgrades in 2006 to date have been associated with a movement into or within the Ba bracket or into investment grade. However, 80% of the downgrades have been associated with movements into or within the B category or below. “The rising number of European defaults reflects this trend, to the extent that defaults can be seen as the distressed tail of the speculative-grade sector,” Zazzarelli said.

On a global basis, Moody’s speculative-grade default rate ended November at 1.8%, unchanged from the October level. Moody’s default rate forecasting model predicts that the global speculative-grade default rate will end the year at 1.8%, rising to 2.4% by the end of November 2007.

The default rate for Europe is expected to follow the global trend, gradually increasing as interest rates are expected to rise further, constraining liquidity and exacerbating the burden of debt repayments for the most highly leveraged issuers.

“Although Moody’s speculative-grade default rate for European corporate issuers is at its highest level since April 2004, it is important to realise that it is still well below its 4.5% historical average,” added Zazzarelli.

A total of three corporate bond issuers rated by Moody’s defaulted during November, on a total of US$510 million of bonds, including one European company, UK-based Luxfer Holdings plc, which defaulted on US$244 million of bonds.

The November total brings the year-to-date global tally to 25 corporate bond issuers – four from Europe, 19 from the U.S. and two from South America – that have defaulted on approximately US$7.5 billion of bonds. This is significantly down on the same period of 2005, when 30 corporate bond issuers defaulted on a total of US$20.2 billion.

Measured on a U.S. dollar volume basis, Moody’s European speculative-grade default rate increased to 1.2% in November from 0.9% in October, more than four times higher than this year’s opening level of 0.3%. Globally, the dollar-weighted speculative-grade default rate edged higher to 2.2% in November from 2.1% in October, but is over 40% down from the level of 3.8% at the beginning of 2006.