Capital Markets

Moody’s Reports Uptick in Junk Defaults

April rise belies longer term health in speculative grades.
Stephen TaubMay 9, 2007

Is Moody’s long-predicted default-rate rise in the junk-bond market beginning to materialize?

Well, only if you look at the short term. In a new report, the credit rating agency said that the 12-month, issuer-weighted, global speculative-grade default rate edged up to 1.5 percent in April, from 1.4 percent in March.

That rate, however, remained lower than the 1.6 percent level it reached a year ago. Further, there was just one Moody’s-rated bond defaulter in April. That issuer, Bally Total Fitness Holding, failed to make interest payments due April 16 on $300 million of senior subordinated notes. Bally also defaulted under the terms of its indenture on $235 million more of senior notes. The company, which hasn’t yet filed its 2006 annual report, was later delisted from the New York Stock Exchange.

So far in 2007, four Moody’s-rated debt bond issuers—three of which are based in the United States— have defaulted on $2 billion in bonds.
SunCom Wireless, which completed a distressed exchange on $750 million bonds in January, remains the largest default of the year, according to Moody’s.

Meanwhile, on a dollar-volume basis, the speculative-grade global bond default rate remained unchanged at 1 percent from March to April. The rate is down slightly from 1.1 percent, which was recorded at the beginning of the year. A year ago, the dollar-weighted global bond default rate was 4.2 percent.

Moody’s has been predicting that the global default rate would increase to 2.4 percent by the end of 2007 and climb to 3.4 percent by the end of April 2008. “Default rates remain low due to a continuation of the benign economic conditions and ample liquidity, which have allowed distressed and lowly-rated credits avoid default,” said Moody’s Director of Corporate Default Research Kenneth Emery.