Capital Markets

Junk Default Rate Edges Up in May

''Corporate credit conditions have been the best in a decade, but a turning point appears near at hand,'' says a Moody's director.
Stephen TaubJune 6, 2006

Moody’s Investor Service has reported that the global speculative-grade default rate climbed slightly in May, to 1.7 percent from 1.6 percent a month earlier.

Though that’s still very low, the firm stressed that three Moody’s-rated corporate bond issuers defaulted last month, compared with just four during the first four months of the year. Further, May saw the first default by a rated European corporate-bond issuer in 15 months.

Silicon Graphics was the month’s largest default, with $258 million in bonds outstanding, according to Moody’s. This year, seven corporate-bond issuers have defaulted on a total of $2.7 billion of bonds, compared with 13 issuers defaulting on $3.2 billion in the first five months of 2005. Automotive-related industries represent 63 percent of this year’s $2.7 billion total.

“Corporate credit conditions have been the best in a decade, but a turning point appears near at hand,” said David Hamilton, a director in Moody’s Credit Policy Group, in a statement. “Going forward, we expect a worsening credit quality, higher interest rates, and macroeconomic uncertainty to apply upward pressure on corporate default rates.”

Moody’s had previously predicted that by the end of May 2007, the junk default rate would climb to 3 percent; since May 2005, the rate has ranged between 1.6 percent and 2.1 percent.

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