The default rate for speculative-grade rated Canadian issuers was at 1.8% at the end of 2004, unchanged from 2003, according to research from Moody’s Investors Services.

The default rate for all rated Canadian issuers (including investment-grade rated issuers) was also unchanged in 2004, at 0.6%.

Only two Canadian public bond defaults were recorded in 2004. Of the two 2004 defaults, only one was rated by Moody’s: Hollinger, Inc, which missed the interest payment on $161 million of its senior secured notes but paid the amount before the end of its grace period. The second default in 2004 was Stelco, Inc., a steel producer that Moody’s does not rate, which had $ 240 million of bonds outstanding when it filed for bankruptcy protection.

No Moody’s-rated Canadian corporate bond issuers have defaulted so far in 2005. However, two unrated Canadian bond issuers have already defaulted, hinting that the default rate for Canadian issuers may be nearing a turning point.

“Although Moody’s does not separately forecast Canadian default rates, we expect that many of the factors driving our prediction of higher global default rates — including rising interest rates and lower average credit quality of new speculative-grade issuance — will also impact the Canadian default rate over 2005-2006,” said Sharon Ou, lead author of the study. Moody’s predicts that the global speculative-grade default rate will rise from its current 2.2% level to 3.2% by March 2006.

Moody’s also reports that between 1989 and 2004, 64 Canadian corporate issuers have defaulted on a total of $32 billion in bonds. Of the 64, 34 issuers totaling $28 billion in bonds were rated by Moody’s.

Defaults by issuers in the telecommunications sector represent nearly half of all defaults in Canada since 1989 by total dollar volume. Six of the 10 largest defaults in Canada were by issuers in the telecommunications sector.

The study also show that credit ratings possess a strong negative correlation with realized default and credit loss rates: the lower the credit rating, the higher the average default rate. Moody’s study also finds variations in default rates across rating categories and investment holding periods have been very similar in the U.S. and Canada.

“The similarity of default rates across rating categories shows that Moody’s considers the various local factors that make Canadian companies different from their peers in the U.S., and consistently reflects those differences in our ratings of Canadian issuers,” said Andrew Kriegler, managing director in Toronto.