Capital Markets

Junk Default Rate Falling, for Now

Moody's expects the global default rate for speculative-grade bonds to finish the year at 2.8 percent, however, and to top 3.2 percent by March 2006.
Stephen TaubApril 13, 2005

The global default rate for speculative-grade or “junk” bonds continued to fall in the first quarter of 2005. The default rate ended the quarter at 2.2 percent, down from 2.3 percent for the fourth quarter of 2004, according to Moody’s Investors Service.

As a percentage of dollar volume outstanding, the global speculative-grade default rate fell to 2.1 percent in the first quarter from 2.5 percent in the previous period.

The U.S. speculative-grade default rate fell to 2.6 percent in the first quarter from 2.8 percent for the fourth quarter of last year, and Moody’s U.S. dollar-weighted default rate dropped to 2.3 percent from 2.5 percent.

Don’t get too comfortable with this trend, however: Moody’s expects the global default rate for junk bonds to finish the year at 2.8 percent and to top 3.2 percent by March 2006.

“Several signs in the corporate credit markets lend support to expectations of a higher default rate by year’s end,” said David T. Hamilton, Moody’s director of default research, in a statement. “Yield spreads have been extremely tight and can only widen going forward. Recently, high-yield deals have been cancelled or re-priced at less favorable terms.”

Hamilton might have also added that General Motors Corp. and Ford Motor Co. are facing possible credit-rating cuts that threaten to crowd the junk-bond market. The prospect has spooked bond investors, who have already lost interest in this class of paper.

Altogether, in the first quarter of 2005, 10 corporate issuers defaulted on a total of $2.2 billion of bonds; seven were based in the United States, two in Sweden, and one in Brazil. R.J. Tower Corp. offered up the largest default, with bonds totaling $453 million. During the previous quarter, 10 issuers defaulted on a total of $8.1 billion of bonds, according to Moody’s.

Corporate defaults in the last year have primarily been driven by U.S. credit quality. Moody’s points out that 33 of the 38 defaults in the past 12 month have been by U.S.-based issuers concentrated in the lowest tiers of speculative-grade ratings.