Defaults drop to 1.4% in August, Moody's says, but big rise expected

New York, Sept. 10 - The global speculative-grade default rate fell to an "extremely low" 1.4% in August from 1.5% in July, according to Moody's Investors Service.

But the rating agency warns it now expects the level to rise "substantially" to 4.1% in August 2008 and 5.1% in August 2009.

Such an increase would bring it up to the long-run historical average.

"Higher spreads and diminished liquidity are putting distressed issuers at increased risk of default. However, as long as the U.S. economy avoids recession, the default rate will likely remain below its long-run historical average of approximately 5.0%," said Kenneth Emery, Moody's director of corporate default research, in a news release.

Moody's forecasting model shows significant variation by region, with a 4.5% rate predicted for the United States by August but 3.0% in Europe.

The U.S. default rate for the most recent trailing 12 months was 1.5%, down from 1.4% in July, 1.7% at the beginning of the year and 2.0% a year ago. The European rate was 2.9% in August, the same as in July and a little lower than 3.0% at the start of the year. A year ago it was 0.8%.

The only bond issuer rated by Moody's that default in August was Fedders North America, Inc., which filed for Chapter 11 and Fedders defaulted on $155 million of rated bonds.

So far this year, 13 Moody's rated bonds totaling $4.1 billion have defaulted.

Also during August, Ziff-Davis Media elected not to make the Aug. 15 interest payment on its senior subordinated notes due 2009. However, the company has a 30-day grace period before Moody's counts the missed payment as a default.

Among leveraged loans, for the ninth consecutive month in August there were no Moody's-rated loan defaults. In August, the trailing 12-month U.S. leveraged loan default rate remained unchanged at 0.3%.

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