Moody's global default rate more than quadruples in 2008, expected to shoot past 12% by end of 2009

By Caroline Salls

Pittsburgh, Jan. 14 - Moody's Investors Service's global speculative-grade default rate finished 2008 at 4%, more than quadruple the closing level of 0.9% in 2007, according to a report released Wednesday.

The ratings agency said it now expects the global default rate to continue to rise this year, likely climbing above 12% by the end of 2009.

"Global economic conditions are now substantially weaker and more perilous than they were in the two previous credit cycles of 1990-91 and 2001-02," Moody's Kenneth Emery said in the release.

"Consequently, Moody's expects that the speculative-grade default rate is likely to exceed the 12% peak it reached in 1991."

Moody's said it expects the European default rate to climb past 16% by the end of the year.

"European economic conditions are now substantially weaker than they were in the last credit cycle of 2001-02," Emery said in a separate release.

Moody's said its quantitative model now forecasts that the global default rate will reach 15.1% by year-end, up from the 10.4% forecasted last month because of a jump in the expected path for the U.S. unemployment rate over the next year.

The forecast implies about 300 corporate defaulters over the next 12 months, or 25 defaulters a month, Moody's reported.

"Moody's quantitative model forecast is being driven by unprecedented corporate spread levels, a record low mix of corporate credit ratings, and expectations of a 9% U.S. unemployment rate by the end of 2009," Emery said in the release.

"Because the model drivers are outside of recent historical experience and future economic conditions remain highly uncertain, the default forecast is subject to some margin of error in this environment."

Measured on a dollar-volume basis, Moody's said the global speculative-grade bond default rate closed at 5.7% in 2008, almost a ten-fold increase from the level of 0.6% at the end of 2007. The corresponding European rate was 1.1%, around 60% higher than 0.7% at the end of the previous year.

Moody's said its quantitative model now predicts that the U.S. speculative-grade default rate will jump to 15.3% at the end of 2009, while the European speculative-grade default rate is expected to rise even more sharply to 18.3%, implying roughly 55 European defaulters over the next 12 months.

According to the report, the trailing 12-month U.S. speculative-grade default rate ended 2008 at 4.4%, about four times higher than the 1.0% level registered at the end of 2007. Meanwhile, in Europe, the speculative-grade default rate finished the year at 2.0%, almost double the 1.1% level observed a year ago.

Among U.S. speculative-grade issuers, the ratings agency said that the dollar-weighted bond default rate surged to 6.6% at the end of 2008, also significantly higher than the level of 0.6% recorded a year ago.

Across industries over the coming year, Moody's said the consumer transportation sector will be the most troubled in the United States and the durable consumer goods sector will have the highest default rate in Europe.

In addition, Moody's speculative-grade corporate distress index, which measures the percentage of rated issuers that have debts trading at distressed levels, rose to 53.1% at the end of 2008, an all-time high record since the index began in 1996.

104 defaults in 2008

In all, a total of 104 Moody's-rated corporate issuers defaulted during 2008, 22 of which were recorded in December, including major newspaper publisher Tribune Co. and global finance provider GMAC.

Among 2008's defaulters, Moody's said 86 were from North America while 12 were from Europe. In comparison, there were only 18 defaulters in 2007 - 15 from North America and three from Europe.

In the leveraged loan market, a total of 33 Moody's-rated issuers defaulted during 2008 compared to only two in 2007. The leveraged loan default rate among U.S. issuers ended at 3.3% in 2008, up from 0.3% at the end of 2007.

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