Capital Markets

Junk Defaults Double in Q2

Six issuers of high-yield debt default, but overall default rates remains relatively steady.
Marie LeoneJuly 12, 2006

The global high-yield bond default rate remained steady at 1.8 percent for the twelve months ending in June, said Moody’s Investors Service on Wednesday. But the June numbers also capped a second quarter that recorded a slightly higher default rate than last quarter’s 1.6 percent.

A total of six Moody’s rated corporate bond issuers defaulted in the second quarter, twice as many as in the first three months of the year. Granite Broadcasting — which missed an interest payment on $405 million worth of senior secured notes due in 2010 — was the only high-yield bond default in June. The other issuers to default on high-yield bonds were Dana Credit, SGI, Werner Holding, PCA International, and Global Automotive Logistics. The France-based Global Automotive was the only non-U.S. company to default this quarter.

Despite the doubling of defaults, Moody’s emphasized that speculative-grade bonds have “charted a horizontal course” over the past year, remaining between 1.6 percent and 2.1 percent.

Nevertheless, Moody’s expects the default rate to rise in the coming months, hitting 2.1 percent by the end of 2006, and 2.8 percent by the second quarter of 2007. Still, the forecast rate is considerably below the 5 percent historical default for high-yield rated corporate bond issuers, according to the ratings agency.

“Although corporate credit may be at or near a cyclical high, we do not foresee a sharp increase in defaults in the near future,” contends David Hamilton, Moody’s director of Corporate Default Research. “Default rates are coming off decade lows and the most likely scenario going forward is one of default rates closer to historical average levels,” adds Hamilton.

The volume of corporate bond defaults totaled $1.4 billion in the second quarter 2006, down from $1.9 billion in the first quarter and $1.7 billion in the second quarter 2005. Dana is the largest defaulting issuer so far in 2006, according to Moody’s. The automotive parts supplier filed for bankruptcy with $1.6 billion of public bonds outstanding.

The default rate for U.S. speculative-grade issuers crept higher to 2.4 percent in the second quarter, from 2.3 percent in the first quarter. Similar to the global trend, the U.S. default rate stayed relatively steady, fluctuating between 2.2 percent and 2.4 percent during the past year.

In Europe, the junk-bond default rate reached 0.5 percent in the second quarter 2006, up from zero in the previous quarter. Last year, the European default rate finished at 1.7 percent in the second quarter.