Junk Bond Defaults Rise but Projected Peak Rate Falls

The global speculative-grade default rate finished the second quarter at 10.1%, up from a level of 7.4% in the previous quarter, said Moody’s Investors Service. A year ago, the global default rate stood at only 2.0%.

The ratings agency’s default rate forecasting model now predicts that the global default rate will reach a peak of 12.8% in the fourth quarter of 2009 before declining to 6.0% a year from now. Moody’s earlier projected a peak close to 15%.

Moody’s model-based default rate forecasts have fallen in recent months as high yield bond spreads have continued to narrow. Looking forward into 2010, under our baseline economic scenario, default rates are expected to decline significantly as many of the weakest rated credits going into this cycle will have defaulted, leaving a pool of relatively stronger issuers. - Moody’s Director of Default Research Kenneth Emery.

The U.S. speculative-grade default rate ended the second quarter at 11.0%, up from 8.0% in the previous quarter. At this time last year, the default rate stood at 2.4%.

Measured on a dollar volume basis, the global speculative-grade bond default rate closed at 16.3% in the second quarter, up noticeably from the 10.6% level from the previous quarter. Last year, the global dollar-weighted default rate stood much lower at 1.3%.

Among U.S. issuers, the dollar-weighted speculative-grade bond default rate ended the second quarter at 18.2%. The comparable rate was 11.8% in the prior quarter and 1.5% a year ago.

Moody’s default rate forecasting model now predicts that the U.S. speculative-grade default rate will reach a peak of 12.9% in the fourth quarter before declining to 5.0% by June 2010. The European speculative-grade default rate is expected to peak at 15.0% in the fourth quarter before falling to 12.5% by June 2010. The higher forecasted European default rates are largely the result of weaker economics as reflected in higher spreads and a relatively higher unemployment rate.

Across industries over the coming year, Moody’s default rate forecasting model indicates that the Automotive sector will be the most troubled in the U.S. and the Durable Consumer Goods sector will have the highest default rate in Europe.

Moody’s speculative-grade corporate distress index — which measures the percentage of rated issuers that have debt trading at distressed levels — closed at 36.7% at the end of the second quarter, down from 51.3% in the previous quarter. A year ago, the index was much lower at 15.6%.

Comments

[Dave Wrixon:]

The problem is that recorded defaults are fact. Moodys projections are at best pure fantasy and at worst mere propaganda.

Jul 09 01:10 PM