Moody's global junk default rate eases to end fourth quarter at 12.5%

By Caroline Salls

Pittsburgh, Jan. 11 - Moody's Investors Service's trailing 12-month global speculative-grade default rate finished at 12.5% in the fourth quarter, down slightly from 12.6% in the previous quarter.

Moody's said the fourth-quarter global default rate peaked in November at 12.9%, surpassing 2001's peak of 10.4% and 1991's peak of 12.2%.

A year ago, the global default rate stood at 4.2%.

The ratings agency said it now predicts that the global speculative-grade default rate will fall sharply over the next year to 3.3% by the end of the fourth quarter.

According to Moody's release, the pace of the decline is expected to be more rapid in the first half of the year with the default rate falling to 6.4% by the end of June.

"With the pace of defaults down sharply during the past several months, it is likely that the global default rate has now reached its cyclical peak for this credit cycle," Moody's Kenneth Emery said in the release.

"If high-yield credit spreads remain at or below current levels, we expect the default rate will fall sharply in 2010.

"The main risk to this forecast is that the global economic recovery falters and companies lose their access to the high-yield bond markets, which would result in a default rate that declines only modestly from current levels."

Regional default rates

In the United States, the trailing 12-month speculative-grade default rate ended the fourth quarter at 13.2%, down from 13.4% at the end of the third quarter, while in Europe the default rate rose to 10.2% from 9.7%.

Moody's said the latest U.S. and European default rates were both off from their November peaks of 13.8% and 10.5%, respectively.

Default count

In all, a total of 32 Moody's-rated corporate debt issuers defaulted in the fourth quarter, which sent the 2009 default count to a record high of 266. In comparison, there were 105 defaults recorded in 2008.

Of the 266 defaults in 2009, 92 were triggered by distressed exchanges.

In 2009, Moody's said the media industry was the worst performer with 45 issuers defaulting. The automotive and hotel/gaming/leisure industries were next with 19 defaulters from each sector.

Across regions, 205, or 77%, of the 2009 defaulters were based in North America, while 30, or 11%, were from Europe. The remaining defaulters were located in Asia and Latin America.

Measured on a dollar volume basis, Moody's said the global speculative-grade bond default rate ended 2009 at 15.6%, down from a peak of 18.9% in November and 18.3% at the end of the third quarter.

In the United States, the dollar-weighted speculative-grade bond default rate ended the fourth quarter at 16.5%, down from 19.7% at the end of the third quarter and a peak of 20.0% in November.

Under its baseline scenario, Moody's said it now predicts that the default rate for U.S. speculative-grade issuers will drop to 3.6% by the end of 2010. Meanwhile, the European speculative-grade default rate is expected to drop to 2.7% by the end of the year.

Across industries over the coming year, Moody's said the default rates are expected to be highest in the consumer transportation sector in the United States and the business service sector in Europe.

Leveraged loans

In the leveraged loan market, a total of 13 Moody's-rated loan defaulters were recorded in the fourth quarter, sending the 2009 loan default count to 113.

The agency said issuers from North America accounted for 108, or 96%, of 2009's loan defaulters.

The trailing 12-month U.S. leveraged loan default rate finished the fourth quarter at 11.6%, up from 10.5% in the previous quarter but down from November's peak of 11.7%.

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