Moody's July global junk default rate jumps to 2.5%; defaults hit double digits for first time since 2003

By Caroline Salls

Pittsburgh, Aug. 7 - Moody's Investors Service's global speculative-grade default rate increased to 2.5% for the 12 months ended in July from a revised level of 2.1% in June, marking the largest monthly increase since the default rate bottomed at 0.9% in November 2007, according to a Moody's news release.

A year ago, Moody's said the global speculative-grade default rate stood at 1.5%.

Moody's said the U.S. speculative-grade default rate also rose noticeably to 3.0% in July from June's revised level of 2.5%. At this time last year, the U.S. default rate also stood at 1.5%.

"The pace of corporate defaults increased considerably in July as economic conditions weakened and more companies experienced financial distress," Moody's Kenneth Emery said in the release.

"Under our baseline model forecast scenario, the global default rate is expected to climb sharply over the next 12 months to 6.3%, while it could reach 10% in a downside scenario of a protracted U.S. recession."

For U.S. speculative grade issuers, Moody's said its forecasting model foresees default rates increasing to 5.7% by the end of this year and 7.2% a year from now.

Across industries over the coming year, Moody's forecasts that the consumer transportation sector, primarily consisting of airline companies, will have the highest default rate in the United States. In Europe, the durable consumer goods sector will be the most troubled, according to the release.

The ratings agency said its speculative-grade corporate distress index, which measures the percentage of rated issuers that have debt trading at distressed levels, rose to 20.7% in July from 17.8% in June.

Moody's said the index was much lower at 3.1% a year ago.

Default details

There were a total of 11 rated defaults in July, Moody's reported, marking the first time since July 2003 that the default count hit double digits.

Year to date, a total of 48 Moody's-rated corporate issuers have defaulted this year, compared to 12 defaults for the same period last year.

Of the 11 defaults from last month, nine were based in the United States. Moody's said the only two defaulters outside of the United States were Ainsworth Lumber Co. Ltd. and Belvedere SA, from Canada and France, respectively.

Measured on a dollar volume basis, the global speculative-grade bond default rate rose to 1.4% in July from a revised level of 1.3% in June. A year ago, Moody's said the global dollar-weighted bond default rate stood at 1.1%.

Among U.S. speculative-grade issuers, the ratings agency said the dollar-weighted bond default rate edged higher to 1.5% in July from June's revised level of 1.4%. At this time last year, the U.S. dollar-weighted bond default rate closed at 1.0%.

In the leveraged loan market, six Moody's-rated loan issuers defaulted in July, all by U.S. issuers. As a result, Moody's said the trailing 12 month U.S. leveraged loan default rate jumped to 2.8% in July from a revised level of 2.0% in June. A year ago, the leveraged loan default rate was only 0.3%.

European default rate

Meanwhile, Moody's said the European speculative-grade default rate for the 12 months ended in July was 0.7%, unchanged from the June figure.

Although Belvedere defaulted in July, Moody's said this was offset by another European defaulter moving out of the trailing 12-month window.

At this time last year, the European rate was substantially higher at 3.1%, Moody's reported.

For Europe, Moody's said it predicts a rise in the speculative-grade default rate to 2.5% by end-2008.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.