Moody's global junk default rate ends third quarter at 2.8%; agency expects jump to 4.2% by year-end

By Caroline Salls

Pittsburgh, Oct. 8 - Moody's Investors Service's global speculative-grade default rate finished the 12 months to the end of the third quarter at 2.8%, up from 2.1% at the end of the second quarter, according to a Wednesday report.

Measured on a dollar volume basis, Moody's said the speculative-grade default rate rose to 2.7% at the end of the third quarter, up from 1.3% in the second quarter.

Moody's said it now predicts that the global speculative-grade issuer-weighted default rate will rise sharply to 4.2% by the end of this year and to 7.9% a year from now.

"With the global credit crisis intensifying and credit spreads widening, it is increasingly likely that corporate default rates will spike sharply in the next 12 months," Moody's Kenneth Emery said in the report.

For U.S. speculative-grade issuers, Moody's said it foresees default rates increasing to 5.1% by the end of this year.

According to the report, the U.S. speculative-grade default rate ended the third quarter at 3.4%, up from 2.5% in the previous quarter. Measured on a dollar-weighted basis, the U.S. rate finished the third quarter at 3.0%, up from 1.4% in the previous quarter.

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

Moody's said its speculative-grade corporate distress index, which measures the percentage of rated issuers that have debt trading at distressed levels, rose to 29.6% at the end of the third quarter from 17.7% at the end of the second quarter.

A year ago, the index was much lower at 4.5%.

The ratings agency said there were a total of 10 rated corporate debt defaulters in September, sending the year-to-date defaulted issuer count to 63.

Included in the 10 defaulters was Lehman Brothers Holdings, Inc., which defaulted on roughly $128.2 billion of debt, making it the largest defaulter in history.

In the leveraged loan market, Autocam Corp. was the only Moody's-rated loan defaulter in September.

Moody's said the trailing 12 month U.S. leveraged loan default rate rose to 2.9% at the end of the third quarter, up from 2.0% at the end of the second quarter.

For Europe, Moody's said it predicts a rise in the speculative-grade default rate to 1.5% by the end of 2008.

Moody's European issuer-weighted speculative-grade default rate for the 12 months to the end of the third quarter was 0.7%, unchanged from the second quarter.

At this time last year, Moody's said this rate was substantially higher at 2.9%.

As a percentage of dollar volume outstanding, the European default rate was 0.9% at the end of the third quarter, up from 0.6% the quarter before, but down from 1.9% one year previously.

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