Capital Markets

Moody’s: Uncertainty Fogs Junk Outlook

The firm's 2009 default forecast "reflects unprecedented corporate spread levels and a record low mix of corporate credit ratings."
Stephen TaubJanuary 14, 2009

Suggesting that about 300 corporate junk-bond issuers will default over the next 12 months, Moody’s predicts that the global speculative-grade default rate will hit 15.1 percent by the end of 2009.

In the United States, the junk default rate will top 15.3 percent by year’s end, while in Europe it will reach as high as 18.3 percent, according to the credit-rating agency.

Moody’s steadily increased its junk-default forecast as 2008 wound down. Its prediction of overall default rose from 10.4 percent to 15.1 because of “a jump in the expected path” of the U.S. unemployment rate over the next year.

At the same time, the firm warned that because the drivers of its predictive model are outside of recent historical experience and because future economic conditions remain highly uncertain, the default forecast may be subject to error. “The model’s forecast reflects unprecedented corporate spread levels and a record low mix of corporate credit ratings,” Moody’s explained.

Moody’s expects that the consumer-transportation industry will experience the highest default rate in the United States throughout 2009. In Europe, the most troubled sector will be durable consumer goods, according to the firm.

The rating agency also noted that its distressed-debt index came in at 53.1 percent at the end of 2008, an all-time record high for the index. The index, which measures the share of speculative-grade companies with debts trading at distressed levels, began to increase in the summer of 2007 and spiked sharply in the final quarter of 2008, Moody’s noted.

The global speculative-grade bond default rate closed at 5.7 percent in 2008, magnitudes above the level of 0.6 percent at the end of 2007. In the United States., the speculative-grade dollar-weighted bond default rate surged to 6.6 percent at the end of 2008 from the 0.6 percent recorded a year ago.

Among Moody’s-rated loan issuers, 33 defaulted during 2008 compared to only two in 2007. The leveraged-loan default rate among U.S. issuers ended at 3.3 percent in 2008, up from 0.3 percent at the end of 2007.