Capital Markets

Junk Default Rate Falls Again

The continuing decline in the default rate somewhat calls into question Moody's earlier prediction.
Stephen TaubJuly 17, 2007

Perhaps the subprime crisis hasn’t caught up with junk-bond issues—at least not yet. Moody’s is reporting that the global speculative-grade default rate finished the second quarter at its lowest level since March 1995. Specifically, the issuer-weighted default rate slipped to 1.4 percent, down a bit from 1.5 percent at the end of the first quarter.

The default rate began the year at 1.7 percent and stood at 1.8 percent a year ago, according to Moody’s. The continuing decline in the default rate somewhat calls into question Moody’s earlier prediction that the global junk-bond default rate would increase to 2.7 percent by the end of 2007, and climb to 3.5 percent by the end of the first quarter of 2008.

Indeed, in its review of the second quarter, Moody’s scaled back its forecasts for the next year. It now expects the speculative default rate to rise to just 1.9 percent by the end of the year, and increase to 3.3 percent by the end of the second quarter of 2008.

Altogether, five Moody’s-rated issuers defaulted during the second quarter. The total amount of debt defaulted on was $1.8 billion, compared to $1.4 billion by three defaulted issuers during the first quarter. Further, the $3.2 billion total for the first half of the year is less than the $3.5 billion 13 issuers defaulted on in the first half of 2006.

So far this year, all but one company that defaulted on junk bonds, has been a U.S. issuer. The largest default was recorded by SunCom Wireless, which completed a distressed exchange on $740 million of bonds in January, added Moody’s.

The debt rating company added that no Moody’s rated issuer has defaulted on leveraged loans in 2007.