Capital Markets

Junk Default Rate Falls Again

An expected uptick in junk-bond defaults has yet to materialize this year.
Stephen TaubAugust 8, 2006

Junk looks good.

The global default rate for speculative-grade debt fell to 1.7 percent in July from 1.8 percent in June, according to Moody’s Investors Service.

This is the fifteenth straight month that the junk default rate has come in below 2.1 percent, according to the credit rating agency.

Among US-based companies, Moody’s issuer-weighted speculative-grade default rate edged down to 2.3 percent in July, from 2.4 percent in June.

The dip in July is surprising: Experts ranging from Moody’s to hedge funds that specialize in distressed securities have been expecting an increase in the default rate in 2006.

Moody’s said its forecasting model predicts that its issuer-weighted global speculative-grade default rate will finish 2006 at 2.1 percent, rising to 2.7 percent by the end of July 2007.

“Not only has the default rate shown very little change in recent months, but so have many of the factors that Moody’s uses to forecast default rates, such as credit rating changes and the trend in industrial production,” said David T. Hamilton, Moody’s director of corporate default research, in a press release. “Nevertheless, the pace of defaults is about as low as it can get. Credit conditions are unlikely to be as favorable going forward.”

Moody’s dollar volume based global speculative-grade default rate also fell slightly in July, to 3.9 percent from 4 percent in June.

Vesta Insurance Group was the only Moody’s-rated corporate bond default in July, missing the interest payment on $56 million of its 8-3/4 percent senior debentures.

The largest default so far in 2006 is Dana Corp., which filed for bankruptcy in March with $1.6 billion of public bonds affected.

Nine of the 10 rated defaulters for 2006 have been based in the US.

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