Moody's reports 1.6% February global junk default rate, lowest since 1997

By Caroline Salls

Pittsburgh, March 7 - The slack pace of bond defaults globally sent corporate default rates to near record lows of 1.6% for the 12 months ended in February, according to a Moody's Investors Service report.

Moody's global speculative-grade default rate fell from 1.8% in January, and February's mark is its lowest level since 1997.

Following the global trend, Moody's European speculative-grade default rate also dropped to 0% in February.

"February's 1.6% global default rate is one of the lowest on record in the modern era of leveraged finance," Moody's David T. Hamilton said in the report.

"The default rate has only been lower in 1997 and 1995, when it hit rock bottom at 1.4% and 1.2%, respectively. The last time the European default rate was zero was in 1998, when the original issue speculative-grade sector in Europe was really just emerging."

According to the report, Moody's forecasting model for its issuer-weighted global speculative-grade default rate indicates that February's default rate may represent a cyclical low and that the pace of defaults will begin to accelerate going forward.

Moody's said it expects that the global speculative-grade default rate will rise from its current 1.6% rate to 3.1% by the end of February 2007.

"The fundamental factors that Moody's uses to predict the default rate - such as changes in the distribution of credit ratings, the seasoning pattern of new issuance and the slope of the Treasury yield curve - have a neutral to slightly negative bias at the moment," Hamilton said in the report.

"Together with the extremely low current rate of default, it is reasonable to expect a gradual rise in the default rate."

While the pace of the number defaulters has slowed, Moody's said the pace of total dollar volume of defaults has increased in recent months. Moody's global speculative-grade dollar-volume weighted default rate fell slightly to 3.6% in February from 3.7% in January, but is up by about 55% from the 2.3% level of February 2005.

"When the dollar-volume default rate rises relative to the issuer-based rate - as it did in 2005 - defaults feel more painful to investors than the issuer-based measure suggests," Hamilton noted in the report.

Integrated Electrical Services ($223 million) was the only Moody's-rated corporate bond default in February. So far in 2006, two corporate defaults have affected a total $358 million of bonds.

Among U.S. issuers, the speculative-grade default rate edged down to 2.2% in February from 2.4% in January. A year ago, the speculative-grade default rate stood at 3.1%.

Moody's European speculative-grade default rate fell to 0% last month from 0.5% in January, indicating that no Moody's-rated European corporate bond issuer defaulted during the last 12 months.

The last Moody's-rated European defaulters were Sweden-based Concordia Bus AB and Concordia Bus Nordic AB, both defaulting in February 2005.

Moody's said the European default rate was 1.8% in February 2005.

The dollar-volume default rate among U.S. issuers remained unchanged at 4.2% from January to February. A year ago, the rate was 2.4%.

Among European issuers, Moody's reported the speculative-grade default rate fell to 0% last month from 0.2% in January.

In the leveraged loan market, J.L. French Automotive Castings, Inc. was the only Moody's-rated default in February. The company had about $465 million of loans outstanding when it filed Chapter 11 bankruptcy.

Moody's said its issuer-weighted loan default rate remained unchanged at 1.9% from January to February.

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