Moody's: November corporate default rate was 9.8%; 10.5% peak seen

By Paul Deckelman

New York, Dec. 17 - Moody's Investors Service said Monday that the global speculative-grade bond default rate rose in November to 9.8% - and is likely to go as high as 10.5% early next year before it starts to come back down.

The ratings agency projected that the global speculative-grade default rate for the 2001 calendar year would come in near 10% - well above 2000's 5.8% rate, but still below the post-Great Depression peak of 13% set back in July 1991, when the junk bond market was in the midst of what is generally considered its worst meltdown ever.

The 9.8% November default rate and the projected 10%-area calendar 2001 rate represent modest increases in the projections which the ratings agency made about a year ago - that the November 2001 default rate would be 9% and the full-year 2001 rate would be 9.5%.

The default situation is more serious among U.S.-domiciled speculative-grade credits (those rated Ba1 or below), whose trailing 12-month default rate rose to 10.6% in November from 10.5% in October. By way of contrast, the trailing 12-month default rates for speculative-grade issuers in non-U.S. markets was 7.9% in November, although this represented a more sizable increase (from 7.5% in October) than occurred month-over-month in the U.S. rate.

Of the 17 corporate issuers defaulting on US $8.2 billion of bond debt in November, all but four are U.S.-based, including the month's largest corporate defaulter, XO Communications Inc. ($4.9 billion).

Other large corporate defaults in November included Huntsman Corp. and Huntsman Polymers Corp., which between them defaulted on US $775 million; United Australia/Pacific (US $492.87 million) and Burlington Industries Inc. (US $431.03 million)

So far this year, 229 issuers have defaulted on more than US $94.5 billion of bonds, versus 167 issuers defaulting on US $49.1 billion for all of 2000. Moody's said the technology/telecommunications sphere has generated the highest proportion of this year's defaults, although it added that "a broad group of industrial sectors was affected."

The year-to-date totals do not include last month's distressed exchange of US $41 billion of Argentine bonds, even though this was an event which falls under Moody's definition of a default, since Argentina is classified as a sovereign rather than a corporate credit.

Moody's noted that its default-rate forecasting model uses macroeconomic variables, interest-rate variables and its own ratings to arrive at its year-ahead default rate projections. The agency's director of default research, David T. Hamilton, declared in the latest report that the latter set of variables - i.e., the distribution of ratings among speculative-grade rated issuers - is "highly predictive."

Hamilton noted, for instance, that the assignment of speculative-grade rating assignments to upstart communications companies "cut through the dot-com hype of the late 1990s" and proved to be a fairly accurate measure of the generally shaky creditworthiness of many such issuers.

"Credit risk for many of these companies coming to market was significant from the beginning, and that credit risk has manifested itself in record default volumes," Hamilton asserted.

He also pointed out a statistic that could be seen as a positive leading indicator for the junk bond market's overall credit quality - the percentage of issues included in Moody's highest speculative-grade category (those rated Ba1, Ba2 or Ba3) has been steadily on the rise this year. Since bottoming out at 27% in January, it has increased to 30% in November - a level not seen since 1999.

"We seem to have passed an inflection point in aggregate credit quality," the Moody's official concluded.

End

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