Capital Markets

Grim Outlook: Moody’s Sees Defaults Soaring

The speculative-grade default rate will rise sharply, says Moody's, as the U.S. recession deepens and lengthens.
Stephen TaubNovember 12, 2008

Moody’s Investors Service warned that the speculative-grade corporate default rate will rise sharply through 2009 as the U.S. recession becomes deep and protracted.

As a result, the default rate in this cycle will likely match or exceed the peak levels reached in the previous two U.S. recessions of 1990-91 and 2000-01.

Specifically, Moody’s forecasts that the junk bond default rate will climb to 4.3 percent by the end of this year and surge to 10.4 percent a year from now.

Last month’s report forecast the global default rate would hit 7.9 percent by September 30 2009. This month’s report predicts the default rate will hit 10.1 percent by Sept. 30, 2009.

For the U.S., Moody’s expects the default rate to climb to 4.9 percent by the end of this year and jump to 11.2 percent a year from now.

Breaking down its forecasts by industry, Moody’s expects the highest defaults rates t5o be suffered by the Consumer Transportation sector in the U.S. and the Durable Consumer Goods sector in Europe.

Moody’s points out that its distressed index, which measures the percentage of speculative-grade companies in distress, jumped significantly in October to 48.5 percent from 29.7 percent in September. “October’s level marks the highest level recorded since 1996 when the index began,” it noted.

The global speculative-grade default rate reached 2.8 percent in October, up slightly from September’s revised level of 2.7 percent. The global default rate stood at just 1.1 percent in October 2007.

Among U.S. issuers, the speculative-grade default rate increased to 3.3 percent in October from a revised September level of 3.1 percent. A year ago, it stood at 1.1 percent.

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