Capital Markets

Low Default Rates to Rise in 2007: Report

The current ''benign global credit environment'' faces widespread predictions for slower economic growth, according to a new Moody's forecast.
Helen ShawJanuary 22, 2007

Default rates on syndicated bank loans and corporate bonds fell in 2006 but are expected to rise in 2007, according to a new report from Moody’s Investors Service.

The current “benign global credit environment” faces widespread predictions for slower economic growth in North America and Europe, wrote Moody’s. True, noted the report, credit quality for speculative-grade issuers held steady in 2006, as did the ratio of downgrades to upgrades. But those forecasts of slower growth, heralded by an inverted yield curve, suggest that some companies may have more difficulty servicing debt obligations in the year ahead, Moody’s observed.

As for the year just past, 28 issuers defaulted on about $6.0 billion of syndicated bank loans, compared with 30 issuers that defaulted on $13.4 billion in 2005. Seven companies in the automobile industry accounted for about $2.3 billion between them, but the leader of the pack was LG Philips Displays Holding, with $1.4 billion in bank debt.

In the corporate bond market, last year 28 issuers defaulted on $7.8 billion in bonds — about one-third of that amount accounted for by the auto industry — compared with 29 issuers defaulting on $28.3 billion in 2005. The $1.9 billion bond default of auto-parts maker Dana Corp. and its finance arm, Dana Credit Corp., was the largest of 2006.

The default rate for issuers of speculative-grade corporate bonds declined to 1.7 percent in 2006 from 1.9 percent in 2005. Last year’s low rate, according to the Moody’s report, was supported by relatively low interest rates, yield spreads, and abundant liquidity. The default rate is expected to climb to 2.6 percent by the end of 2007, Moody’s added, though this level would still be well below the long-term average of 5 percent.

Loan default rates — which historically run 20 percent lower than default rates for speculative-grade bonds, noted Moody’s — are forecast to rise to 2.1 percent by the end of this year.