Capital Markets

Junk Default Rate at Eight-Year Low

Global corporate speculative-grade bond default rate is very near the record low, but it's expected to edge upward by year-end.
Stephen TaubDecember 7, 2005

Despite rising interest rates, the credit quality of companies with a junk-bond rating continues to strengthen.

According to Standard & Poor’s Ratings Services, the global corporate speculative-grade bond default rate moved to a new eight-year low of 1.40 percent at the end of November. That’s not quite as low as the record 1.28 percent, posted in the second quarter of 1997. On the other hand, the global speculative-grade default rate has now remained below the long-term (1981 to 2004) average of 4.96 percent for 24 consecutive months.

In the United States, the default rate for the trailing three months has been edging up since July, according to S&P, although it did drop in November.

Why so little turmoil in the junk-bond market? S&P cited expectations of relative economic stability, relatively favorable financing conditions, and healthy corporate profitability.

Even so, Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group, predicted that the global default rate will edge up slightly before the end of 2005.

S&P added that the U.S. default rate is forecast to average 2.5 percent during the next four quarters, slightly higher than the 2.1 percent historical average of the trailing four quarters, and to reach 2.8 percent by the third quarter of 2006.

Meanwhile, Moody’s predicted that the junk default rate will rise to 2.5 percent by mid-year and 3.3 percent by November 2006.

As of December 6, a total of 18 companies (one more than a month earlier) remained vulnerable to default on rated debt worth $23.3 billion, according to S&P. An average of 30 companies were vulnerable to default during 2004.