Global Corporate Default Rate Remains Low in 2012 Despite More Defaults

Against a macroeconomic backdrop of a continued economic uncertainty in Europe, corporate defaults among Moody's-rated issuers were up in 2012, the rating agency says in its 26th annual default study, "Corporate Default and Recovery Rates, 1920-2012."


"World-wide, 58 Moody's-rated corporate issuers defaulted in 2012, compared with 37 in 2011," says Vice President and Senior Analyst Sharon Ou. "Along with increasing financial stress from the European sovereign debt crisis at the beginning of the year, defaults were elevated in the first quarter, when 23 companies defaulted, while in the subsequent quarters there were 11 or 13 defaults."


Defaults in 2012 were led by the consumer industries and capital industries sectors, Ou says. Together they registered 23, or 40%, of the year's count. The former includes the beverage, food, tobacco, consumer goods, healthcare, and gaming and leisure industries, while the latter includes the automotive, capital equipment, chemicals, construction and building, forest products and paper, and metals and mining industries.


Across regions, defaults remained concentrated in North America last year, where 44 issuers defaulted on $29.0 billion of debt. Elsewhere, nine defaults occurred in Europe, four in Latin America and one in Africa.


"Last year's default count of 58 matched almost exactly our year-ago forecast of 63 defaults," says Managing Director of Credit Policy Research, Albert Metz. "The overall incidence of defaults remained low in 2012, due mainly to an extremely accommodative monetary environment allowing distressed borrowers to access the debt markets and refinance debt on favorable terms."


Moody's global speculative-grade default rate ended 2012 at 2.6%, up from the year-end 2011 level of 1.9% and consistent with the rating agency's year-ago forecast of 2.9%. The default rate for all Moody's-rated corporate issuers rose to 1.3% at the end of 2012 from 0.9% at the end of 2011, which likewise was consistent with the agency's year-ago forecast of 1.4%.


Looking ahead, Moody's speculative-grade default rate forecasting model predicts that the global rate will remain low in 2013, and finish the year at 2.7%. If realised, this will be just above last year's closing level of 2.6%, and well below the average of 4.7% since 1983.


"We believe the monetary environment will remain accommodative in the near future," Metz says. "Financial market conditions have been relatively benign in recent months, and the downside risks facing the global economic recovery have diminished since the end of last year."


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