Moody's raises default forecast after record quarter

New York, July 29 - Moody's Investors Service raised its forecast for the 2002 default rate to 8.8% from 7% after the second quarter saw a record dollar amount of defaults.

During the three-month period, 42 issuers defaulted on more than $42.6 billion of debt, almost double the $21.4 billion seen in the first quarter and the highest quarterly figure ever, Moody's said.

At 42, the number of issuers defaulting was, however, still below the quarterly record of 58 set in the first quarter of 2001.

The rating agency added that its default rate forecasting model continues to predict a decline in the default rate by the end of 2002.

However, with the higher-than-anticipated level of defaults in the second quarter, Moody's said it is raising its forecast for the default rate at the end of 2002.

Moody's also said that its forecast through the end of June 2003 indicates that the default rate may turn back up before it begins to decline again.

Over the next 12 months, most of the decline in the default rate is predicted to occur in the last two quarters of 2002. Thereafter, the default rate is forecast to hover in its year-end 2002 8.8% range through the second quarter of 2003.

"We continue to see a relatively high ratio of credit rating downgrades to upgrades, which suggests that near-term default risk has not completely subsided," said David Hamilton, Moody's director of default research, in a news release. "A significant decline in the default rate will not occur until credit quality shows some signs of sustained improvement."

In June the high-yield default rate held steady at 10.3%, the same level it has held since March, according to Moody's.

The figures reflect a high pace of defaults by telecommunications companies and non-U.S. issuers, Moody's added.

The global dollar volume-weighted speculative-grade default rate for the 12 months ending June was 17.6% compared to 14% for the 12 months ending in the first quarter.

"The severity of the telecommunications sector collapse is fully appreciated by looking at the default statistics for the industry," said Hamilton. "Through the first half of 2002, 55% of defaults by volume and 37% as a percentage of issuers have been telecommunications firms."

Excluding telecommunications defaults, the dollar volume-weighted speculative grade default rate ending June 2002 is 10%, 760 basis points lower.

The largest defaults in the first half were NTL Communications at $8.5 billion, Adelphia Communications at $6.9 billion, United Pan-Europe Communications at $5.1 billion, Global Crossing at $3.8 billion and Kmart at $2.5 billion.

Although globally the pace of defaults is high, the default rate for U.S. corporate bond issuers has declined since the beginning of the year, falling from a peak of 11.1% in January to 10.3% in June, Moody's said.

Outside the U.S., the speculative-grade default rate rose to 10.3% in June from 9.1% in January.

Europe saw 14 defaults totaling $20.8 billion in the first half of 2002.

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