The trailing 12-month global speculative-grade default rate finished at 3.1% in the fourth quarter of 2010, down from 4.0% in the previous quarter, Moody's Investors Service said in a new report. This level is close to the ratings agency's forecast of 3.3% made a year ago. The global default rate stood much higher at 13.1% in the fourth quarter of 2009.
The ratings agency's default rate forecasting model now predicts that the global speculative-grade default rate will fall to 1.9% in 2011 under a stable baseline scenario. In a pessimistic scenario, which incorporates a renewed liquidity freeze and further economic contractions, the global default rate could finish at 6.1%, while in an optimistic scenario, the rate could dip even further to 1.2%.
"The story of 2010 is how few defaults were actually recorded," says Albert Metz, Managing Director of Credit Policy Research. "Our baseline expectations call for continued stability in 2011. But that baseline assumes that additional significant sovereign and financial sector problems do not develop in Europe."
In the U.S., the speculative-grade default rate ended the fourth quarter at 3.3%, also down from 4.0% in the third quarter, while in Europe, the default rate fell to 1.9% from 3.5%. At the end of 2009, the U.S. default rate stood at 14.1% and the European rate was 11.3%.
Moody's forecasting model projects the default rate to fall to 2.1% by December 2011 among speculative-grade issuers in the U.S. and 1.2% among those in European.
A total of 19 Moody's-rated corporate debt issuers have defaulted in the fourth quarter, which sends the 2010 default total to 59. In comparison, there were 269 defaults last year of which 32 were recorded in the fourth quarter.
The largest number of defaults came from the media: advertising, printing, & publishing industry in 2010 with six companies in that sector defaulting. This is followed by the capital equipment sector, the hotel, gaming, & leisure sector, and the retail sector, each of which contributed five defaults.
Across regions, 48 (or 81%) of the 2010 defaulters were from North America while seven (or 12%) were from Europe. The remaining defaulters were from Asia and Latin America.
Across industries over the coming year, default rates are expected to be highest in the consumer transportation sector in the U.S. and the media: advertising, printing, & publishing sector in Europe.
Measured on a dollar volume basis, the global speculative-grade bond default rate closed at 1.6% in 2010. The current level is down from the level of 2.0% from the previous quarter. A year ago, the global dollar-weighted default rate stood much lower at 16.4%.
In the U.S., the dollar-weighted speculative-grade bond default rate ended the fourth quarter at 1.6%, down from third quarter's 1.8%. The latest US dollar-weighted bond default rate is significantly lower than the 16.6% a year ago. In Europe, the dollar-weighted speculative-grade bond default rate fell from 2.6% in the third quarter to 1.7% in the final quarter of 2010. At this time last year, the European speculative-grade bond default rate was much higher at 13.1%.
Moody's speculative-grade corporate distress index -- which measures the percentage of rated issuers that have debt trading at distressed levels -- came in at 10.5% at the end of the fourth quarter, down from the level of 15.0% in the previous quarter. A year ago, the index was much higher at 22.7%.
In the leveraged loan market, a total of four Moody's-rated loan defaulters were recorded in the fourth quarter, sending the entire year's loan default count to 23. The trailing 12 month U.S. leveraged loan default rate finished the fourth quarter at 2.8%, down from 4.1% in the previous quarter. In 2009, the U.S. loan default rate ended at 12.0%.
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