Moody's: Default Rate Falls for First Time Since January 2008

Here is yet another signal that the global economic crisis is winding down.


The trailing 12-month global speculative-grade default rate finished at 12.5% in the fourth quarter of 2009, down slightly from 12.6% in the previous quarter, said Moody's Investors Service in its latest monthly default report. During the fourth quarter, the global default rate peaked in November at 12.9%, which surpassed 2001's peak of 10.4% and 1991's peak of 12.2%. A year ago, the global default rate stood at 4.2%.


The ratings agency's default rate forecasting model now predicts that the global speculative-grade default rate will fall sharply over the next year to 3.3% by the end of the fourth quarter. The pace of the decline is expected to be more rapid in the first half of the year with the default rate falling to 6.4% by the end of June.


"With the pace of defaults down sharply during the past several months, it is likely that the global default rate has now reached its cyclical peak for this credit cycle. If high yield credit spreads remain at or below current levels, we expect the default rate will fall sharply in 2010. The main risk to this forecast is that the global economic recovery falters and companies lose their access to the high yield bond markets, which would result in a default rate that declines only modestly from current levels," says Moody's Director of Default Research Kenneth Emery.


In the U.S., the speculative-grade default rate ended the fourth quarter of 2009 at 13.2%, down from 13.4% at the end of the third quarter, while in Europe the default rate rose to 10.2% from 9.7%. The latest U.S. and European default rates were both off from their November peaks of 13.8% and 10.5%, respectively. At the beginning of 2009, the U.S. default rate stood at 4.7% and the European rate at 2.1%.


In all, a total of 32 Moody's-rated corporate debt issuers defaulted in the fourth quarter, which sent the 2009 default count to a record high of 266. In comparison, there were 105 defaults recorded in 2008. Of the 266 defaults in 2009, 92 (or 35%) were triggered by distressed exchanges.


In 2009, the media industry was the worst performer with 45 issuers defaulting. The automotive and hotel/gaming/leisure industries were next with 19 defaulters from each sector.

Across regions, 205 (or 77%) of the 2009 defaulters were based in North America while 30 (or 11%) were from Europe. The remaining defaulters were located in Asia and Latin America.

Measured on a dollar volume basis, the global speculative-grade bond default rate ended 2009 at 15.6%, down from a peak of 18.9% in November and 18.3% at the end of the third quarter. A year ago, the global dollar-weighted default rate was much lower at 5.9%.


In the U.S., the dollar-weighted speculative-grade bond default rate ended the fourth quarter at 16.5%, down from 19.7% at the end of the third quarter and a peak of 20.0% in November. A year ago, this default rate stood at 6.7%.


Under its baseline scenario, Moody's forecasting model now predicts that the default rate for U.S. speculative-grade issuers will drop to 3.6% by the end of 2010. Meanwhile, the European speculative-grade default rate is expected to drop to 2.7% by the end of the year.


Across industries over the coming year, default rates are expected to be highest in the consumer transportation sector in the U.S. and the business service sector in Europe.


Moody's speculative-grade corporate distress index -- which measures the percentage of rated issuers that have debt trading at distressed levels -- came in at 18.8% at the end of the fourth quarter, down from 28.5% in the previous quarter. A year ago, the index stood much higher at 54.1%.


In the leveraged loan market, a total of 13 Moody's-rated loan defaulters were recorded in the fourth quarter, sending the 2009 loan default count to 113. Issuers from North America accounted for 108 (or 96%) of 2009's loan defaulters. In 2008, only 34 loan issuers defaulted, all by North American issuers. The trailing 12-month U.S. leveraged loan default rate finished the fourth quarter at 11.6%, up from 10.5% in the previous quarter but down from November's peak of 11.7%. In 2008, the U.S. loan default rate ended at 3.4%.


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