Defaults appear to have peaked after falling to 9% in October, Moody's says

New York, Nov. 27 - The global high-yield default rate fell to 9% in October from 9.5% in September, according to Moody's Investors Service - prompting the rating agency to say that defaults appear finally to have peaked.

Moody's noted that October's decline was the eighth in the last 10 months.

For the U.S., the default rate was 8.3% in October, down from 9% in September.

During October five rated issuers default on $2.1 billion of bonds. Biggest among the defaulters was Jazztel plc with $660 million of debt.

Year-to-date, 120 issuers have defaulted on $141 billion of debt.

The dollar-volume weighted default rate also declined in the month, falling to 17.2% in October from 18.3% in September. That was the second consecutive decline. September recorded the first fall in this measure in 16 months.

Moody's is expecting the global speculative-grade default rate will continue to decline going forward, reaching close to 8.5% at the end of the year.

In 2003 the rating agency expects defaults will remain on a downward trend dropping to 6.7% at the end of the third quarter.

However Moody's also cautioned that it expects default rates to remain above their 3.5% historical average for "the foreseeable future" and will not return to average levels until 2004.

"Barring another massive default, it seems that the dollar-volume default rate has finally peaked," said David T. Hamilton, director of default research at Moody's, in a news release.

"Fundamental credit quality remains under pressure and default activity will continue to be high in nominal terms, however, it will be relatively less intense going forward."

Hamilton went on to note: "Defaults in 2002 have been characterized by a seemly contradictory trend.

"Even as the likelihood of default has decreased in 2002, the severity of default in terms of the size of default has, until recently, increased significantly."

Hamilton noted that the average default size has been over $800 million for speculative-grade rated issuers, substantially higher than the $250 million long-run historical average - and the figures exclude extremely large fallen angel defaults such as WorldCom, which defaulted on over $23 billion of rated bonds.

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