Junk Bond Default Rate to Quadruple - Moody's

Includes: IEF, SHY, TLT
by: Judith Levy

Global defaults by speculative-grade (junk-rated) companies, now at a 26-year low of 1.1%, are forecast to quadruple to 4.2% next year, Moody's Investors Service said in a report released Thursday. The forecast is viewed by some analysts as a formal indicator that the era of easy credit is now at an end. The outlook is based on an expectation that the U.S. economy will continue to slow but will not fall into recession. If a recession does take place, defaults could hit "double-digit levels," wrote Moody's default analyst Kenneth Emery. "We're certainly looking for an economic slowdown next year and a pick-up in default rates," said ABN Amro macro credit strategist Simon Ballard. "Any default rate above 3.5% would require a very bearish outlook on the U.S. economy." In 2002, the global junk bond default rate reached 8.2% as 133 junk-rated borrowers defaulted on $143.2 billion of bond and loan debt. NYU finance professor Edward Altman attributes the expected surge in defaults to the high proportion of poor-quality issues in the high-yield market. About half of new high-yield bond issues in 2007 were rated B-minus or lower, and the newly tightened credit environment has made it much harder for distressed firms to refinance.

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