Moody’s Investors Service expects the global speculative-grade default rate will spike this year.
So far, the rate is up to 1.1% at the end of January, from a revised closing level of 0.9% for 2007. The recent
increase comes off of a two-decade record low level reached in November 2007, when the speculative-grade default rate came in just below 0.9%.
“January is the second consecutive month in which the speculative-grade default rate has now increased,” says Moody’s Director of Corporate Default Research Kenneth Emery. In January 2007, the global spec-grade
default rate was at 1.8%.
Moody’s default rate forecasting model now predicts that the global speculative-grade default rate will rise sharply to 4.6 % by the end of this year and increase further to 4.8% by January 2009. The year-end
forecast is close to the long-term average of 4.5% since 1983.
“Importantly, the model’s baseline forecast does not assume a U.S. recession. If a significant recession were to occur, default rates could reach over 10% as they have in previous recessions,” adds Emery.
The default rate forecasting model indicates that the Construction & Building sector will be the most troubled industry among U.S. issuers over the next 12 months.
Moody’s speculative-grade corporate distress index, which measures the percentage of rated issuers that have debt trading at distressed levels, reached 18.8% in January, the highest level since November 2002. The index has been increasing sharply since last summer when it had been fluctuating in the 2.0% range during the first half of 2007.
A total of seven Moody’s-rated corporate issuers defaulted in January, the highest default count in a month since 2004. In 2007, the average default count was only 1.5 issuers per month for a total of 18 defaulters. Of the seven defaulters in January, six were by U.S. issuers and the other was based in Canada.
Meanwhile, in Europe, Moody’s speculative-grade default rate dropped to 0.7% in January. According to Andrea Zazzarelli, associate director of Corporate Default Research in Moody’s London-based Credit Policy team, “The downward trend in the European default rate reflects the fact that the effects of the credit crunch have so far remained largely confined to the financial sector on this side of the Atlantic.”
“Expectations around defaults are clearly on the upside and closely tied to the fate of the US economy. Given the lags between the North American and European credit cycles, we expect a relatively more contained rise in defaults in Europe as highlighted by our forecasts over the next twelve months,” Zazzarelli explains.
Measured on a dollar volume basis, the global speculative-grade bond default rate closed at 0.7% in 2007, up from 0.6% in December. A year ago, the global dollar-weighted bond default rate was 1.2%.