Global Junk Bond Default Rate Continues to Decline

by: Research Recap

The trailing 12-month global speculative-grade default rate dropped to 3.3% in November 2010, down from a level of 3.7% in October, said Moody’s Investors Service in a new report. A year ago, the global default rate stood much higher at 13.6%.

The ratings agency’s default rate forecasting model now predicts that the global speculative-grade default rate will fall to 2.9% by the end of this year before declining further to 1.8% by November 2011.

We continue to expect stable, low default rates for the near future,” said Albert Metz, Moody’s Director of Credit Policy Research. “However, there are risks that defaults may increase, particularly if financing becomes scarce in the European markets.

In the U.S., the speculative-grade default rate edged lower from 3.6% in October to 3.5% in November. At this time last year, the U.S. default rate reached the highest level in this cycle at 14.7%. Meanwhile, the European default rate among speculative-grade issuers declined to 1.9% in November from 2.8% in October 2010. The default rate in Europe stood at 11.5% in November 2009, which was also the peak in the financial crisis.

Among U.S. speculative-grade issuers, Moody’s forecasting model foresees the default rate falling to 3.1% by December 2010, then sliding further to 2.1% a year from now. In Europe, Moody’s forecasting model projects the speculative-grade default rate to end this year at 2.0% before dropping to 1.2% in November next year.

A total of seven Moody’s-rated corporate debt issuers have defaulted in November, which sends the year-to-date default count to 52. In comparison, a total of 257 defaults were recorded in the comparable time period last year. All of November’s defaults were by North American issuers except for Anglo Irish Bank Corporation Limited, which is based in Ireland.

Across industries over the coming year, default rates are expected to be highest in the Hotel, Gaming, & Leisure sector in the U.S. and Media: Advertising, Printing and Publishing sector in Europe.