Moody’s Default Measure Falls for First Time Since January 2008
Media sector was last year's worst performer
January 11, 2010
A measure of corporate defaults tracked by Moody’s fell in the fourth quarter to 12.5% from 12.6% in the third quarter, the first time the measure has declined since January 2008.
While that measure showed a minor decline in the default rate, problems with corporate credit remain elevated.
During the fourth quarter, the global default rate peaked in November at 12.9%, which surpassed 2001's peak of 10.4% and 1991's peak of 12.2%. A year ago, the global default rate stood at 4.2%.
The rating agency said it now expects the global speculative-grade default rate to fall sharply over the next year to 3.3% by the end of the fourth quarter. The pace of the decline is expected to be more rapid in the first half of the year with the default rate falling to 6.4% by the end of June.
"With the pace of defaults down sharply during the past several months, it is likely that the global default rate has now reached its cyclical peak for this credit cycle,” the rating agency said in a report published on Monday. “If high yield credit spreads remain at or below current levels, we expect the default rate will fall sharply in 2010.”
However, the credit rating agency warned that its expectations for a decline in default rates could be tripped up if the U.S. or global economies falter. Also, the rating agency warned that a lockdown in credit markets sutting high yield debt markets down could propel default rates higher.
In the U.S., the speculative-grade default rate ended the fourth quarter of 2009 at 13.2%, down from 13.4% at the end of the third quarter, while in Europe the default rate rose to 10.2% from 9.7%. The latest U.S. and European default rates were both off from their November peaks of 13.8% and 10.5%, respectively. At the beginning of 2009, the U.S. default rate stood at 4.7% and the European rate at 2.1%.
In 2009, the media industry was the worst performer with 45 issuers defaulting. The automotive and hotel/gaming/leisure industries were next with 19 defaults from each sector.
On a dollar volume basis, the global speculative-grade bond default rate ended 2009 at 15.6%, down from a peak of 18.9% in November and 18.3% at the end of the third quarter. A year ago, the global dollar-weighted default rate was much lower at 5.9%.
In the U.S., the dollar-weighted speculative-grade bond default rate ended the fourth quarter at 16.5%, down from 19.7% at the end of the third quarter and a peak of 20.0% in November. A year ago, this default rate stood at 6.7%.
Under its baseline scenario, Moody's forecasting model now predicts that the default rate for U.S. speculative-grade issuers will drop to 3.6% by the end of 2010. Meanwhile, the European speculative-grade default rate is expected to drop to 2.7% by the end of the year.
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