Risk Management

Moody’s Says Corporate Default Risk Dropped ‘Markedly’

But risk still remains at 20-year highs due to huge indebtedness, sluggish earnings prospects, and volatile equity markets.
Stephen TaubJuly 26, 2001

Companies are less likely to default on their debt than they were a month ago, according to Moody’s Risk Management Services.

But, don’t get too smug. The default risk still remains at 20-year highs due to huge indebtedness, sluggish earnings prospects, and volatile equity markets, says Moody’s.

The rating agency said that the probability of defaulting on debt by public companies across North America over the next year subsided markedly last month.

The median one-year probability of default (PD) for weaker companies was 5.9 percent at the end of June, according to Moody’s RiskCalc North American Credit Quality Index. This means that 180 companies will miss payments on loans, bonds, or other debt securities between now and the beginning of July 2002, says the firm.

The one-year PD was down from 6.2 percent in May, but still substantially above the 3.9 percent median PD for North American companies at the height of the recession in December 1990.

Which industries contain the companies that are most at risk to default? Number one is the communications sector (12.1 percent PD on average), followed by retail-wholesale (9.4 percent), transportation (7.9 percent), and high-tech (7 percent), says Moody’s.

The industries with the lowest risk are: utilities (2.3 percent), food products (3.8 percent), and building (4.3 percent).

Moody’s said the median one-year probability of default for weaker European companies was only 2.1 percent in June, up from a just 1.6 percent a year earlier.

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