Capital Markets

Moody’s Sees Sharp Drop in Junk-Default Rate

Improvements in fundamental credit quality, spurred by strengthening macroeconomic conditions, hold speculative debt above water.
Stephen TaubMay 12, 2004

While investors might be shunning fixed-income investments because of a fear of rising interest rates, those with positions in speculative-grade debt could soon have reason to cheer.

That’s because the improving economy will probably lead to a steep drop in the junk-bond default rate, according to a new report from Moody’s Investors Service. The rating agency said, in fact, that the global issuer-weighted speculative-grade default rate dropped slightly in April, to 4 percent from 4.2 percent the prior month. That’s off by 40 percent from a year ago, when the rate was 6.7 percent.

Indeed, April’s decline was the sixth straight monthly drop in the global default rate. Moody’s now predicts that the global junk-default rate will fall to 2.8 percent at the end of the year, and to 2.6 percent by April 2005.

Moody’s attributes the lower expected default rates mainly to improvements in fundamental corporate credit quality — thanks in part to strengthening macroeconomic conditions. The rating agency also sees improving credit-quality trends over the next year.

In other good news on the junk front, the ratio of credit-rating upgrades to downgrades improved to 1-to-1.1 in April from 0.7-to-1 in March. In April 2003 the ratio was 0.5-to-1.

So far this year, 14 corporate-bond issuers have defaulted on a total of $4.4 billion worth of bonds, 12 of them U.S. issuers. The largest defaulters so far this year include RCN Corp., Avon Energy Partners Holdings, and Jordan Industries.