Global 2003 junk bond default rate falls: Moody's

Global 2003 junk bond default rate falls: Moody’s

Lower default rates expected in 2004

By: James Langton
January 12, 2004 January 12, 2004
16:20

The global junk bond default rate fell to 5.2% in 2003 from 8.4% a year earlier and should continue to decline this year, Moody’s Investors Service said Monday.

Worldwide, 77 issuers rated by Moody’s defaulted last year on $33.5 billion of debt, down from 141 defaults totaling $163 billion in 2002, Moody’s said.

The default rate is expected to fall to 3.4% by the end of this year, the first time since 1999 that the rate has dropped below its long-term historical average of 4.9%, Moody’s said.

“The decline in credit rating downgrades relative to upgrades in 2003 supports lower expected default rates in 2004,” said David Hamilton, Moody’s director of corporate default research. “The ratio of downgrades to upgrades fell from four to one in 2002 to under two to one in 2003. Additional help is coming from growth in US industrial production, which is correlated with future credit quality, and a steep Treasury yield curve, which has historically been a harbinger of economic growth.”

For December, the global issuer-weighted speculative-grade default rate dipped to 5.2%, down slightly from 5.3% in November, even though the pace of corporate defaults leapt for the month. Last month, eight corporate bond issuers defaulted on a total of $1.7 billion, compared with just one default in November and two in October. In 2003’s final quarter, 11 corporate issuers defaulted on a total of $2.6 billion of bonds.

For a third consecutive year, the telecommunications sector experienced the highest total number of defaulting issuers and default volume, with 13 issuers and $6.4 billion. Healthcare and the energy and utility sectors experienced the second and third highest default volumes, respectively.

Although three corporate issuers defaulted in 2003 within a year of holding an investment-grade credit rating, no defaulting issuers began the year with an investment-grade credit rating, resulting in a 2003 investment-grade default rate of zero. In 2002, 16 investment-grade rated issuers that held an investment-grade rating at the beginning of the year defaulted.