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
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
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)