Moody's global junk default rate inches up to 2.0% in August

By Caroline Salls

Pittsburgh, Sept. 8 - The global speculative-grade bond default rate edged up to 2.0% in August from 1.8% in July, according to a Moody's Investors Service report.

Moody's said it expects the speculative-grade default rate to rise relatively modestly over the next six to 12 months, despite the hurricane's uncertain impact, energy price shocks and pockets of clear sectoral weakness in the airline and auto industries.

"Risk premiums for high-yield bonds remain at subdued levels, indicating that investors do not expect losses from rising defaults in the near term," Moody's David T. Hamilton said in the report.

Moody's default rate forecasting model for its issuer-weighted global speculative-grade default rate predicts that the global default rate will end 2005 at 1.8% and rise to 3.1% by the end of August 2006.

The global default rate is down from 2.3% at the start of 2005 and from 2.4% 12 months ago.

Over the long term, Hamilton noted that factors including higher interest rates and slower economic growth point to default rates closer to their 4.9% historical average.

Last month, four U.S.-based corporate issuers defaulted on a total of $1 billion of bonds, the report said.

Foamex LP and Foamex Capital Corp. defaulted on $500 million of bonds that were co-issued by the two companies.

Also, Anchor Glass Container Corp. filed for Chapter 11 bankruptcy, affecting $350 million of bonds.

Fedders North America, Inc. announced on Aug. 31 that it would not make its Sept. 1 interest payment on $155 million of bonds.

In the first eight months of 2005, 18 corporate issuers have defaulted - 15 in the United States, two in Sweden and one in Brazil.

The four August defaults raised the U.S. speculative-grade default rate to 2.4% last month from 2.1% in July. The U.S. default rate stood at 2.9% at the beginning of 2005 as well as in August 2004.

Among European issuers, default rates remained unchanged at 1.6% from July to August.

Year to date, defaulted bonds totaled $4.5 billion, significantly lower than $7.1 billion for the comparable period in 2004.

The largest single default this year remains that of Collins & Aikman, which defaulted on $915 million of bonds in May.

As a percentage of dollar volume, the U.S. speculative-grade default rate rose to 2.1% in August from 1.9% in July. As a percentage of dollar volume, the European speculative-grade default rate remained unchanged at 1.4% for a second month.

No loans rated by Moody's defaulted in August, leaving the issuer-weighted default rate for U.S. leveraged loan issuers unchanged at 1.7% from July to August.

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