Capital Markets

Good Sign? Moody’s Tempers Default Forecast

While the junk-bond default rate climbed last month, the rating service trims a bit the high year-end rate it expects, thanks to a decline in bond ...
Stephen TaubMarch 5, 2009

The junk bond default rate climbed to 5.2 percent in February, from 4.8 percent in the prior month, according to Moody’s Investors Service. But while the credit rating agency still expects this figure to soar over the next year, it has actually trimmed its forecast.

Moody’s now predicts that the global default rate will rise to 14.8 percent by year-end, then edging lower to 13.8 percent by February 2010. Just one month ago, it was forecasting a 16-percent default rate for the end of 2009.

Moody’s also believes the 2009 peak global default rate will be 15.3 percent sometime in the fourth quarter, down from the 16.4 percent that it had forecast last month. The reduction in forecasts, it says, is due mainly to a recent modest decline in high-yield bond spreads, which are one factor in Moody’s default forecasting model.

“The high level of uncertainty surrounding the potential length and severity of the current global economic downturn imply similarly high uncertainty for model-based forecasts of default rates,” according to Kenneth Emery, Moody’s director of corporate default research. “There is going to be some modest movement in our forecasts month to month.”

The issuer-weighted default rate among U.S. speculative-grade issuers increased to 5.7 percent in February from 5.2 percent in January. Measured on a volume basis, the U.S. speculative-grade bond default rate rose from 6.9 percent to 7.6 percent.

In February 2008 the issuer- and volume-weighted U.S. speculative-grade default rates stood at 1.5 percent and 1 percent, respectively. Moody’s predicts the speculative-grade default rate will rise to 13.8 percent in the U.S. at year-end, then peak at 14.5 percent the next November.

A total of 17 Moody’s-rated issuers defaulted in February, including 13 U.S. issuers.

In the leveraged loan market, the trailing 12-month U.S. leveraged loan default rate remained unchanged at 4 percent in February.