High yield default rates show biggest drop in 11 years, fall to 6.9% in March, Moody's says

By Peter Heap

New York, April 3 - The global high yield default rate tumbled to 6.9% in March from 7.7% in February, according to Moody's Investors Service.

The 1.4 percentage point drop is the biggest one-month decline since the second quarter of 1992, Moody's added.

The rate is down from 8.3% at the end of 2003 and has now declined for 12 consecutive months since peaking in January 2002.

"The rate of decline of default rates appears to be accelerating," said David T. Hamilton, Moody's director of default research, in a news release.

In addition, Moody's said the pace of downgrades compared to upgrades also appears to be slowing. During the first quarter there were 0.65 upgrades to high-yield issuers for every downgrade, improved from 0.3 in the first quarter of 2002.

Moody's is forecasting that the junk default rate will fall to 6.3% in March 2004.

But the rating agency also noted that there were two prominent defaults in the first three days of April, Air Canada and Fleming Cos.

"I think we're going to see a slight rise in the default rate mid-year, then a continued fall," Hamilton said, attributing the expected increase to economic weakness. "Industrial production is a variable in our model, and if IP contracts, it will lift the default rate."

During March eight issuers defaulted on $6.5 billion in debt. The largest defaults were HealthSouth Corp. with $1.3 billion and Magellan Health Services, Inc. with $3.3 billion.

For the first quarter, 25 companies worldwide defaulted on $11.3 billion of bonds, compared with 47 defaults on $34 billion in the first quarter of 2002.

For U.S. issuers, the junk default rate fell to 5.7% in March from 6.2% in February. In total 17 U.S. issuers defaulted on $8.7 billion during the first quarter.

Non U.S. defaults came from eight issuers with $2.6 billion. The U.K. had three defaults, led by British Energy at $657 million. Argentina, Canada, Germany, Luxembourg and Mexico had one default each.

On a dollar-volume basis, the global speculative-grade corporate bond default rate fell to 16.4% in March from 16.8% in February.

Among U.S. issuers, the dollar-volume speculative-grade corporate bond default rate fell to 10.1% from 10.2% in February.

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