Capital Markets

Credit Quality Still Hanging On: Moody’s

The U.S. speculative-grade default rate ended the quarter at 1.4 percent, its lowest level in 25 years, but the credit-ratings agency expects the d...
Stephen TaubApril 11, 2007

Two reports from Moody’s Investors Service indicate that credit quality continues to strengthen despite recent predictions that the tide is about to turn.

One Moody’s report found 1.1 ratings upgrades for every downgrade during the first quarter of 2007; during the previous quarter, upgrades and downgrades were roughly equal.

In a separate report, Moody’s observed that as of the end of the first quarter, the speculative-grade corporate default rate declined to its lowest level since April 1997. The global issuer-weighted trailing 12-month default rate fell to 1.4 percent, down from 1.6 percent at the beginning of this year.

Moody’s U.S. speculative-grade default rate also ended the quarter at 1.4 percent, its lowest level in 25 years. What’s more, no Moody’s-rated bond or loan issuers defaulted in March, the second month in a row without such a default.

The credit-ratings agency did point out, however, that there were several unrated defaults, including New Century Financial, the nation’s second largest subprime mortgage lender. Moody’s also warned that several of its rated issuers appear likely to default in the next several months, either because they have proposed distressed-debt exchanges to their debtholders or they have missed interest payments.

Overall, the first quarter of 2007 saw a total of just three defaults, compared with ten in the fourth quarter of 2006. The leveraged loan market recorded no defaults in the first quarter; the previous three-month period saw two defaults, affecting $900 million of loans.

Looking ahead, Moody’s predicted that the global speculative-grade default rate will increase modestly by the end of 2007, to 2.7 percent, then to 3.5 percent a year from now.

In a statement, director of corporate default research Kenneth Emery anticipated a relatively benign default environment over the next year, measured against the long-run average default rate of 5.1 percent. “Factors likely to push default rates modestly higher during the next year include slower growth of the U.S. economy and seasoning effects from relatively low-rated debt that was issued during the past several years,” he added.

Associate analyst Jennifer Tennant, author of the upgrade-downgrade report, was also mildly pessimistic about the near future. “Looking ahead, the distribution of rating reviews and outlooks appears less positive — with more issuers on review for downgrade than for upgrade and more negative outlooks than positive outlooks — but these indicators have been very stable over the previous four quarters,” she wrote.

At the end of the first quarter of 2007, Tennant elaborated, 3.7 percent of rated issuers were on review for downgrade, compared with 1.6 percent on review for upgrade; 9.1 percent had negative outlooks, compared with 7.7 percent with positive outlooks.

As in the previous quarter, the credit outlook for investment-grade issuers is slightly more positive than for speculative-grade issuers, Moody’s also reported.