Moody's: June global junk default rate holds steady at 1.8%

By Caroline Salls

Pittsburgh, July 12 - Moody's Investors Service's global speculative-grade default rate for the 12 months ended in June was 1.8%, unchanged from its May level, according to a Wednesday report.

Moody's said June's 1.8% default rate caps a second quarter with only marginally higher default rates compared to the 1.6% rate in the first quarter of 2006.

Corporate default rates have charted a horizontal course over the past 12 months, remaining in a 1.6% to 2.1% range, the agency noted.

Moody's default rate forecasting model for its global speculative-grade default rate predicts a moderate rise over the next 12 months as the model predicts that the global speculative-grade default rate will finish the year at 2.1%, rising to 2.8% by the end of the second quarter of 2007.

The ratings agency said the forecasted default rate is considerably below the 5% historical default for speculative-grade rated corporate bond issuers.

"Although corporate credit may be at or near a cyclical high, we do not foresee a sharp increase in defaults in the near future," Moody's David T. Hamilton said in the report.

"Default rates are coming off decade lows and the most likely scenario going forward is one of default rates closer to historical average levels."

Corporate bond issuer defaults

A total of six rated corporate bond issuers defaulted in the second-quarter 2006, twice as many as in the first quarter.

Granite Broadcasting Corp. was the sole June Moody's-rated bond default.

Five out of the six corporate bond defaults in the second quarter were by U.S.-based issuers, and the default rate for U.S. speculative-grade issuers edged higher to 2.4% in the second quarter from 2.3% in the first quarter of 2006.

Moody's said the U.S. default rate has fluctuated in a narrow range over the past year, between 2.2% and 2.4%, similar to the global trend.

Global Automotive Logistics SAS was the only European default in the second quarter. The company is also the only Moody's-rated default in Europe in the last 16 months.

In Europe, the speculative-grade default rate finished at 0.5% in the second-quarter 2006, up from zero in the previous quarter. Last year, Moody's said the European default rate was recorded at 1.7% in the second quarter.

The volume of corporate bond defaults totaled $1.4 billion in the second-quarter 2006, down from $1.9 billion in the first quarter and $1.7 billion in the second-quarter 2005.

Moody's said Dana Corp. is the largest defaulting corporate bond issuer thus far in 2006.

Measured on a dollar volume basis, the global speculative-grade default rate fell slightly to 4.0% in the second quarter from 4.2% in the first quarter.

Nevertheless, Moody's said the current dollar-weighted global default rate is twice as high as the 2.0% level recorded at the end of the second-quarter 2005.

According to the ratings agency, the significant jump in the dollar-weighted default rate on a year-over-year basis was mainly driven by several large defaults, including Calpine and Charter Communications Holdings, LLC.

Moody's U.S. dollar volume-weighted default rate edged down to 4.6% in the second quarter from 4.7% in the first quarter.

Similar to the comparable global series, Moody's said the U.S. dollar-weighted default rate more than doubled from a level of 2.0% recorded a year ago.

In Europe, the dollar volume-weighted default rate rose from zero percent in the first quarter to 0.1% in the second quarter. Moody's said the current European dollar-weighted default rate is just a fraction of the 1.4% level recorded in the second-quarter 2005.

Leveraged loan numbers

In the leveraged loan market, Werner Holding Co., Inc. was the sole Moody's-rated loan default for the month of June, and for the second quarter.

Year to date, five loan issuers have defaulted on a total of $1.4 billion of loans.

Global Automotive Logistics SAS is the only loan default in Europe, while the other four are all based in the United States.

Moody's U.S. trailing 12-month leveraged loan default rate arrived at 1.5% at the end of the second-quarter 2006, down from 1.9% in the first quarter and also lower than the 1.7% default rate of the second-quarter 2005.

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