Moody's third-quarter global default rate rises to 12%; defaults down

By Caroline Salls

Pittsburgh, Oct. 7 - Moody's Investors Service's trailing 12-month global speculative-grade default rate finished at 12.0% in the third quarter, up from 10.6% in the previous quarter, according to a report released Wednesday.

A year ago, the global default rate stood at only 2.8%.

The rating agency said it now predicts that the global speculative-grade default rate will rise to a peak of 12.5% in the fourth quarter of this year and then decline sharply to 4.5% a year from now.

"Moody's baseline model forecast for sharply declining default rates over the next year assumes a sustained modest economic recovery with the U.S. unemployment rate reaching a peak of 10.5% in 2010," Moody's Kenneth Emery said in the release.

"The forecast is consistent with previous credit cycles where, prior to the 1991 and 2002 peaks, default rates declined to close to their long-run historical average of roughly 5% in the following 12-18 months."

According to the release, the U.S. trailing 12-month speculative-grade default rate ended the third quarter at 12.9%, up from 11.5% in the second quarter, while in Europe the default rate rose to 9.3% from 6.4%.

In all, a total of 50 Moody's-rated corporate debt issuers defaulted in the third quarter, down from 89 in the first quarter and 83 in the second quarter.

Measured on a dollar-volume basis, Moody's said the global speculative-grade bond default rate closed at 18.1% in the third quarter, up from 16.5% at the end of the previous quarter.

The European dollar-volume default rate increased to 7.7% in the third quarter from 4.2% in the second quarter.

Among U.S. speculative-grade issuers, Moody's dollar-weighted speculative-grade bond default rate ended the third quarter at 19.5%, compared to 18.4% in the second quarter.

For U.S. speculative-grade issuers, Moody's said it predicts that the default rate will peak at 13.5% in the fourth quarter before declining sharply to 4.4% by the third quarter of 2010.

Meanwhile, the agency said the European speculative-grade default rate will rise to a peak of 10.9% in the fourth quarter before declining to 6% a year from now.

Overall, the ratings agency said the automotive industry was the worst performer in the third quarter as seven companies in that sector defaulted.

The advertising/publishing/printing media industry followed closely behind with six defaults.

Across regions, Moody's said 39 of the third-quarter defaulters were based in North America, while eight were from Europe. The remaining defaulters were based in South America and Asia.

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

Moody's said its speculative-grade corporate distress index stood at 28.1% at the end of the third quarter, down from 36.3% in the previous quarter.

In the leveraged loan market, a total of 19 Moody's-rated loan defaulters were recorded in the third quarter, sending the year-to-date loan default count to 94.

Moody's said all but one of the third-quarter loan defaulters were North American issuers.

The trailing 12-month U.S. leveraged loan default rate ended the third quarter at 9.9%, up from 8.8% in the previous quarter.

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