Global Junk Default Rate Hits 12%, Nears Expected Peak

Oct. 8.09 | About: ELEMENTS DJ (DOD)

Moody’s says global speculative-grade default rate will rise to a peak of 12.5% in the fourth quarter of this year and then decline sharply to 4.5% a year from now.

Excerpts from Moody’s “September Default Report”

The trailing 12-month global speculative-grade default rate finished at 12.0% in the third quarter of 2009, up from a level of 10.6% in the previous quarter and only 2.8% a year ago.

The U.S. speculative-grade default rate ended the third quarter at 12.9%, up from 11.5% in the second quarter, while in Europe the default rate rose to 9.3% from 6.4%. At this time last year, the U.S. and European default rates stood at 3.2% and 0.7%, respectively.

In all, a total of 50 Moody’s-rated corporate debt issuers defaulted in the third quarter, down from 89 in the first quarter and 83 in the second quarter. Last year, only 62 defaults were recorded in the first three quarters of the year.

For U.S. speculative-grade issuers, Moody’s forecasting model predicts that the default rate will peak at 13.5% in the fourth quarter before declining sharply to 4.4% by the third quarter of 2010.

Overall, the Automotive industry was the worst performer in the third quarter as seven companies in that sector defaulted. The Advertising/Publishing/Printing Media industry followed closely behind with six defaults. Across regions, 39 of the Q3 defaulters were based in North America while eight were from Europe. The remaining defaulters were domiciled in South America and Asia.

Across industries over the coming year, Moody’s default rate forecasting model indicates that the Consumer Transportation 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 — stood at 28.1% at the end of the third quarter, down from 36.3% in the previous quarter. A year ago, the index stood at 26.8%.