Credit losses soared in 2001 as defaults rose and recovery rates fell, Moody's says

New York, Feb. 26 - Credit losses reached record levels last year as default rates soared and recovery rates fell, according to a new study by Moody's Investors Service.

Defaults - as measure by the global speculative-grade rate - hit a 10-year high of 10.2% in 2001, almost double the 2000 rate, Moody's said.

At the same time, recovery rates fell to 21 cents on the dollar, down from 25 cents in 2000 and well below the low of 27 cents seen in the last recession, the rating agency said. Moody's also noted 2001's recovery rate much smaller than the average of 40 cents over the last 20 years.

Breaking down the figures, Moody's said recovery rates were 58.0 cents for senior secured bonds in 2001, 36.5 cents for senior unsecured bonds, 19.9 cents for senior subordinated bonds and 16.4 cents for junior subordinated bonds.

Moody's also found its data showed an inverse correlation between default rates and defaulted bond recovery rates.

"The fact that recoveries are low when the default rate is high suggests that credit losses on a bond portfolio will be most severe exactly when they are most likely to happen," observed David T. Hamilton, director of default research at Moody's Investors Service, in a news release.

During last year, 212 rated issuers defaulted on $135 billion of debt. The 10 largest defaults accounted for $46.5 billion of that, including Enron Corp. at $9.9 billion, Finova Capital Corp. at $6.3 billion, Pacific Gas & Electric at $5 billion, XO Communications at $4.9 billion and Southern California Edison Co. at $3.6 billion.

For all rated corporate issuers worldwide, the default rate rose to 3.7% in 2001, well above the average 1.4% average default rate since 1980, Moody's added.

The rating agency's default forecasting model predicts the default rate for all rated companies will peak in the first quarter of 2002 near it 2001 year-end level, and will fall over the rest of the year to end at 2.1%.

For speculative grade-rated issuers, Moody's said it expects the default rate to decline from its 10.2% 2001 rate to 6.8% by the end of 2002.

"Driving the decline in default rates is an improvement in the credit profile of the Moody's rated universe," said Hamilton. "Many of the lowest-rated defaulters that came to market since 1997 have defaulted, and new issuers have come to market with much higher average ratings, resulting in a stronger credit quality cohort of issuers."

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