Asia Pacific High-Yield Corporates Default Rate Seen to Peak at 4.3 Percent in September

The trailing 12-month high-yield default rate for Asia Pacific corporates -- including speculative grade issuers in Asia, Australia and Japan -- is expected to peak at about 4.3% in September and to end 2014 slightly lower at about 3.3%, according to a Moody's Investors Service report.

"Looking back over 1H 2014, the default rate had risen to 4.1% as of end-July from 2.2% as of end- 2013," says Clara Lau, a Moody's Group Credit Officer.

Lau notes that the rising default rate was attributed to three additional defaulters since the beginning of this year, resulting total of five defaulters during the trailing 12 months period ended July 2014.

The three rated defaulters thus far in 2014 are Midwest Vanadium (WR) which missed a bond interest payment in February, China Forestry Holdings Co. Ltd (Ca/NEG) which failed to meet interest obligations on its $180 million notes in June, and the distressed exchange of PT Bumi Resources Tbk (Ca/STA) in July.

The rise in the high-yield default rate -- as well as the forecast for a higher default rate for the full year in 2014 compared to 2013 reflects the slowing of China's growth as the country rebalances the economy and credit stays tight.

At the same time, the ASEAN economies, particularly those that are commodity reliant, are vulnerable to the growth correction in China, a major consumer of commodities- /resource-related products.

"We expect these challenges to continue for the rest of the year," says Lau.

Moody's notes that the rising default trend in Asia contrasts with that in the US and Europe.

In the US, the speculative grade default rate has decreased to 1.8% as of end-July from 2.2% as of end-2013, while the default rate in Europe has also fallen to 1.8% from 4.4%.

The overall transition trend was downward for the period August 2013 to July 2014. A total 85% of the ratings remained unchanged. Around 10% of the ratings migrated downwards compared to 5% which migrated upwards.

Rating stability of the portfolio falls as it goes down the rating scale.

Compared to global peers, Asian corporates overall exhibited relatively higher rating stability, except at the B or lower rating categories.


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