Defaults by Canadian corporate bond issuers have increased in pace with the global trend in the last half-decade, but have trended downward over the last two years.

Those findings are from the first Canadian corporate bond default study by Moody’s Investors Service. The report was released Wednesday.

Moody’s has been rating Canadian corporate bond issuers since 1909, but this study is the first to focus on defaults since the rise of high-yield bonds as a distinct asset class.

The study analyzes the issuance, rating migration, default, and recovery and loss rates of corporate bond issuers domiciled in Canada from 1989 to the present.

The rise in the default rate for Canadian corporate issuers tracks the increase in issuance of speculative grade rated debt, or junk bonds, in the late 1990s. “Once largely dominated by investment grade issuers in the financial and energy sectors, the Canadian corporate bond market has diversified and matured quickly, particularly the speculative grade segment of this market,” said Andrew Kriegler, managing director of Moody’s Canada.

He noted that junk bonds constitute about one-third of the Canadian corporate bond market, roughly the same as in the U.S.

Despite the recent rise in defaults by Canadian corporate bond issuers, default rates are, on average, somewhat lower relative to the U.S. and the rest of the world. The one-year average default rate for all rated Canadian firms is 1.9%, compared to 2.4% for U.S. firms. From 1989-2002, 53 Canadian issuers defaulted on a total of $29 billion of bonds. Of these, 30 issuers, totalling $26 billion, were rated by Moody’s.

The report also reveals a strong correlation between Moody’s ratings and the probability of default. The study finds that most Canadian issuers that subsequently defaulted had carried deep speculative-grade ratings well in advance of default.

The authors of the study found that 89% of Canadian issuers’ ratings remained unchanged over one year, while 10% experienced a one-notch upgrade or downgrade. However, Canadian issuers were slightly more likely than U.S. issuers to experience an upgrade than a downgrade.

Moody’s study also found that recovery rates for Canadian corporate bonds are generally lower relative to those of U.S. issuers.

“However, the defaulted debt of telecommunications issuers represents a large proportion of defaulted Canadian bonds. The low recovery rate for this sector further skews the Canadian averages,” adds Sharon Ou, associate analyst and co-author of the report.

The report, titled “Default & Recovery Rates of Canadian Corporate Bond Issuers, 1989-2002,” is available on www.moodys.ca.