Moody's global junk default rate climbs to 10.1% in second quarter

By Caroline Salls

Pittsburgh, July 8 - Moody's Investors Service said its trailing 12-month global speculative-grade default rate finished the second quarter at 10.1%, up from 7.4% in the previous quarter, according to a Moody's release.

The ratings agency said it now predicts that the global default rate will reach a peak of 12.8% in the fourth quarter of 2009 before declining to 6.0% a year from now.

"Moody's model-based default rate forecasts have fallen in recent months as high-yield bond spreads have continued to narrow," Moody's Kenneth Emery said in the release.

"Looking forward into 2010, under our baseline economic scenario, default rates are expected to decline significantly as many of the weakest rated credits going into this cycle will have defaulted, leaving a pool of relatively stronger issuers."

In addition, Moody's said it now predicts that the U.S. speculative-grade default rate will reach a peak of 12.9% in the fourth quarter before declining to 5% by June 2010.

The European speculative-grade default rate is expected to peak at 15.0% in the fourth quarter before falling to 12.5% by June 2010. Moody's said the higher forecasted European default rates are largely the result of weaker economics as reflected in higher spreads and a relatively higher unemployment rate.

Regional rates up

The trailing 12-month U.S. speculative-grade default rate rose to 11% in the second quarter from 8% in the previous quarter, and the European speculative-grade default rate increased to 5.6% in the second quarter from 4.5% in the first quarter, Moody's reported.

In all, a total of 163 Moody's-rated corporate debt issuers have defaulted so far this year, of which 76 were recorded in the second quarter.

In comparison, Moody's said there were 16 and 20 defaults in the first and second quarter of last year, respectively.

Dollar-volume results

Measured on a dollar-volume basis, Moody's said the global speculative-grade bond default rate closed at 16.3% in the second quarter, up noticeably from the 10.6% level from the previous quarter, meanwhile, the European dollar-volume junk bond default rate edged higher to 4.2% in the second quarter from 4% in the first quarter.

Among U.S. issuers, the dollar-weighted speculative-grade bond default rate ended the second quarter at 18.2%. The comparable rate was 11.8% in the prior quarter and 1.5% a year ago.

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

Moody's speculative-grade corporate distress index, which measures the percentage of rated issuers that have debt trading at distressed levels, closed at 36.7% at the end of the second quarter, down from 51.3% in the previous quarter.

Default breakdown

Overall, about 64 of the second quarter's defaults were by North American issuers, while European companies accounted for another four defaults.

Across industries, Moody's said the media and automotive industries had the largest number of defaulters.

In the leveraged loan market, a total of 41 Moody's-rated loan defaulters were recorded in the second quarter, sending the year-to-date loan default count to 69. Of the second quarter's loan defaulters, 37 were North American issuers while the remaining four were from Europe and Asia, with two each.

The trailing 12 month U.S. leveraged loan default rate ended the second quarter at 8.2%, up from 5% in the previous quarter.

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