Capital Markets

Moody’s: Junk Defaults to Surge

Though at a historically low level presently, the speculative-grade default rate is expected to skyrocket over the next year.
Stephen TaubDecember 6, 2007

Call this the calm before the storm.

The global speculative-grade debt default rate ended November at 1 percent — down only slightly from 1.1 percent the prior month but the lowest level reached since December 1981, when it stood at 0.7 percent, Moody’s Investors Service reported.

In the United States, the trailing 12-month-issuer weighted speculative-grade default rate also edged lower in November, likewise finishing at 1 percent.

On a year-over-year basis, the U.S. default rate is down 46 percent from its November 2006 level of 1.9 percent, according to Moody’s.

“Currently low default rates reflect the easy credit conditions of the past couple of years, which allowed most issuers to refinance on favorable terms, and strong economic growth, which has allowed issuers to make their debt service payments,” said Kenneth Emery, Moody’s director of corporate default research.

Yet Moody’s expects the trend to dramatically shift over the next year.

The debt-rating company predicted that the global speculative-grade default rate will rise sharply to 4.2 percent a year from now. By November 2009, Moody’s forecasted, the global default rate will reach 4.7 percent.

In the United States, Moody’s predicted the default rate will stand at 4.7 percent a year from now.

“Our baseline forecast incorporates a slowing U.S. economy in 2008 but no recession,” said Emery. But if, in fact, if a recession were to materialize, default rates could increase to near double-digit levels, Moody’s warned.

Indeed, the speculative-grade corporate distress index, which measures the percentage of rated issuers that have debt trading at distressed levels, reached above 10 percent in November, up from 7 percent last month and its highest level in almost five years.