Capital Markets

Rising Defaults Haunt Surging Bond Market

Moody's notes 101 issuer defaults last year, and projects about 300 in 2009.
Stephen TaubFebruary 26, 2009

The global credit crisis, of course, gets most of the blame for why companies must pay hefty premiums to sell new bond issues these days. But there’s another factor: Investors concerned that they may not get their money back, or at least all of it.

This concern is underscored by a new report from Moody’s Investors Service, which notes that 101 corporate issuers rated by Moody’s last year defaulted on a total of $238.6 billion of bonds and $42.7 billion of loans.

What’s more, this year it expects this number to triple, to around 300.

Recoveries also are likely to be below historical averages as a result of strong loan issuance in recent years, warns Moody’s Director of Corporate Default Research Kenneth Emery. “Because recovery rates are negatively correlated with default rates, recovery rates on defaulted debt are likely to decline in 2009 as default rates continue to increase,” he adds.

In its twenty-second annual study of default and recovery rates, Moody’s said that its global speculative-grade default rate ended 2008 at 4.1 percent, more than quadrupling 2007’s year-end level of 0.9 percent. The default rate for all Moody’s-rated corporate issuers rose to 1.9 percent at the end of 2008 from a measly 0.3 percent at year-end 2007.

For the first time since 2003, rating downgrades in 2008 surpassed rating upgrades, Moody’s also points out. The upgrade-to-downgrade ratio fell significantly from 2.0 in 2007 to 0.3 in 2008.

Earlier this week Standard & Poor’s pointed out that the number of potential “fallen angels” — issuers downgraded to speculative grade (BB-plus and lower) from investment grade (BBB-minus and higher) — has reached an 18-year high. According to that credit rating agency, 75 entities worldwide, representing debt topping $174 billion, were identified as potential fallen angels in the most recent month. This compares with an average of 47 potential fallen angels per month in 2008.

Little surprise, then, that even as new bond issuance has surged 40 percent, the current spread on investment-grade debt is around 467 basis points, and 1374 points on speculative-grade debt, according to S&P.