LONDON Aug 6 Moody's Investors Service has sharply lowered its peak default rate forecasts for speculative-grade companies thanks to a sharp narrowing in spreads and a re-opening of the high-yield bond market.
The rating agency no longer expects the default rate to be worse in Europe than in the United States, a scenario that it had been predicting for several months, while the global rate is likely to match levels last seen in 1991.
Moody's now predicts the European speculative-grade default rates will peak at 12 percent in the first quarter of 2010, while the U.S. and global default rates will peak in the fourth quarter this year at 12.7 and 12.2 percent, respectively.
Last month, the rating agency had forecast peak default rates of 15 percent in Europe, 12.9 percent in the U.S. and 12.8 percent globally, and back in April had predicted Europe's default rate would peak above 21 percent.
"As 2009 has progressed, Moody's model forecasts for the peak default rate in this cycle have fallen significantly as high-yield bond spreads have narrowed," said Kenneth Emery, Moody's director of default research.
"This narrowing of spreads and the recent re-opening of the high-yield bond market is allowing many issuers to refinance their debt who might otherwise have defaulted."
The global junk-grade default rate rose to 10.7 percent in July, surpassing the 2002 peak of 10.4 percent, from a revised 10.3 percent in June. It remains below the 1991 peak of 12.2 percent.
In Europe, the speculative-grade bond default rate edged higher to 4.6 percent in July from 4.2 percent in June, while the U.S. rate rose to 11.5 percent in July 2009 from a revised 11.2 percent in June and from 2.7 percent in July 2008.
The rating agency expects default rates in the U.S. to fall sharply from peak levels to 3.8 percent a year from now. In Europe, however, the easing in the rate will be more gradual, falling to 8.7 percent in July 2010.
Globally, Moody's predicts a speculative-grade default rate of 4.4 percent in July 2010.
Sixteen Moody's-rated corporate debt issuers defaulted in July 2009, which increases the year-to-date default count to 183.
In comparison, only 46 defaults were recorded in the comparable period of 2008. Across regions, 10 of July's 16 defaults were by North American issuers, while the remaining defaulters were from Europe, Asia and South America.
Moody's distressed index improved to 34.6 percent in July 2009 from June's level of 37 percent. A year ago, however, the index was considerably lower, at 18.3 percent.
In the leveraged loan market, a total of seven Moody's-rated loan defaulters were recorded in July 2009, all but one being North American companies. The trailing 12-month U.S. leveraged loan default rate edged lower to 8.4 percent in July 2009 from 8.5 percent in June.
A year ago, the loan default rate stood at 2.8 percent. (Reporting by Natalie Harrison, editing by Will Waterman)