The total dollar volume of corporate bond defaults jumped in 2005, reports Moody’s Investors Service, even as the number of issuers defaulting on Moody’s-rated corporate bonds fell for the fourth consecutive year.

Moody’s said that 32 of its rated corporate bond issuers defaulted on a total of US$29 billion of bonds in 2005, compared with 36 issuers and a total of US$16.5 billion in 2004.

The default rate for all Moody’s-rated corporate issuers fell to 0.6% in 2005 from 0.8% in 2004. As a percentage of dollar volume outstanding, the default rate for all rated corporate issuers increased to 0.8% in 2005 from 0.5% in 2004. The speculative-grade default rate fell to 1.9% in 2005 from 2.3% in 2005 by the number of issuers, but increased to 3.8% from 2.6% on a dollar volume basis.

“The year 2005 was, by many conventional measures, a positive year for corporate credit quality,” said David Hamilton, director of corporate default research and lead author of the report. “Default rates remained low, recoveries on defaulted bonds were well above average, and aggregate credit rating revisions were favorable.”

However, Hamilton cautioned that “the year was also marked by heightened concern among investors about the direction of corporate credit quality. Various events have refocused attention on credit risk, including rating downgrades to speculative-grade for major U.S. auto makers, defaults in a handful of widely-held industry sectors, and a rise in the size of defaults.”

Moody’s expects the rate of corporate defaults to rise in 2006 as the pace of both economic growth and positive credit rating revisions slows. Moody’s default rate forecasting model for its issuer-weighted global speculative grade default rate predicts that the default rate will rise from its current 1.9% level to 3.3% by the end of 2006.

“The odds are decidedly tilted in favor of higher default rates going forward,” Hamilton said. “Nevertheless, we expect the default rate to remain below its 5% historical average in 2006, likely rising above that in 2007.”

Four major trends characterize corporate defaults in 2005: U.S.-based issuers constituted the majority of defaults; defaults were concentrated in a handful of troubled industries; the average size of default increased in 2005; and the defaults of several large, widely-held issuers have made the defaults that have occurred more painful for investors.

Of the 32 defaults in 2005, U.S-based issuers accounted for 29 of them. The three non-U.S. defaults were from Brazil and Sweden. Defaults were concentrated in the auto/auto parts sector and airlines. Measured by total default volume, the independent power sector was the top defaulting industry sector at US$8.4 billion. The cable sector, with bonds totaling US$6.9 billion, followed by the airline sector, were the second- and third-largest defaulting industry categories, respectively.

Several large defaults in 2005 boosted the average size of default to US$905 million, compared with US$457 million in 2004. Among the largest defaulters were issuers widely held in investors’ portfolios, including two Calpine affiliates, Delphi Corporation, Delta Airlines and Northwest Airlines. Charter Communications Holdings LLC was 2005’s largest default by total bond volume at US$6.9 billion.

The positive credit environment in 2005 was also reflected in higher than average recovery rates for defaulted bonds and bank loans, Moody’s noted. The average recovery rate for defaulted senior unsecured bonds was 55.9% in 2005, substantially greater than the historical average of 35.9% but a down slightly from 2004’s 59.9% level. Defaulted senior secured bank loans recovered an average 81.6% in 2005, down from 86.1% in 2004 but higher than the 70% historical average.

“A number of factors may explain why average recovery rates have recently been elevated, such as a reduced supply of or increased demand for defaulted assets, a reduction in high-yield spreads, and cyclically higher asset values,” said Praveen Varma, vice president and co-author of Moody’s report.

“However, given the negative historical correlation between default rates and recovery rates, we are likely to see a decline in average recovery rates going forward as default rates rise from their current lows,” Varma said.