The past couple of years were tough ones for Canadian firms as defaults accelerated, says Moody’s Investors Service in a new report.

The ratings firm says that defaults reached an all-time high in 2008 and 2009, with 28 firms defaulting in the period. Of the 28 defaults, 12 occurred in 2008 affecting $5.5 billion of debt, and 16 occurred in 2009 affecting $17.0 billion of debt. Default rates among Moody’s-rated Canadian issuers were 5.6% in 2008 and 5.1% in 2009, both significantly higher than the historical average of 1.8%.

Overall, 2009 was a record year for defaults with the highest number since 1989. In terms of default value, however, there were more defaults in 2000 when Canadian issuers defaulted on $18.4 billion of debt.

“In contrast to the 2001 recession, which was dominated by telecom failures, Canadian defaults in the current cycle were driven in large part by the forest products sector, one of the country’s traditional industries,” said Sharon Ou, author of the report.

Among speculative-grade issuers, the Canadian default rate jumped from 1.3% in 2007 to 11.0% in 2008 and 10.3% in 2009, Moody’s said. The Canadian speculative-grade default rate peaked in this cycle at 13.9% in January 2009, just below the previous peak of 14.0% recorded in 2001, it added.

Looking ahead, Moody’s expects the Canadian speculative-grade default rate to fall sharply over the next 12 months. The ratings agency’s model now predicts that the default rate will finish this year at 4.8%, a level close to its historical average of 4.7%.

Measured by the upgrade/downgrade ratio, average credit quality also deteriorated among Canadian corporate issuers in 2008 and 2009 as the ratio fell from 0.6x in 2007 to 0.2x in both 2008 and 2009, said the report. Prior to 2008, the annual upgrade/downgrade ratio has averaged 0.8x since 1989.

Over the last 20 years, between 1989 and 2009, 101 rated and unrated Canadian issuers defaulted on a total of $67.1 billion in debt, Moody’s said. By sector, 31% of the defaults were by issuers from Canada’s basic industries such as forest/paper products and metal/mining.

IE