Moody's global junk default rate hits fresh low in September at 1.5%

By Angela McDaniels

Seattle, Oct. 9 - Moody's Investors Service said its global speculative-grade corporate default rate for the 12 months ended in September fell to 1.5% from 1.8% in the second quarter and 1.9% at the start of the year, marking a fresh low in the default rate for speculative-grade corporate issuers in this credit cycle.

The agency said that prior to September's data, the default rate ranged between 1.6% and 2.1% since May 2005. The third-quarter figure is also the fourth-lowest level on record since 1985; in only three other months has the default rate been lower (May 1997, March 1995 and April 1995).

Moody's predicted that the speculative-grade default rate is likely to rise marginally in the short run. Specifically, the agency said its forecasting model predicted that the global issuer-weighted speculative-grade default rate will remain virtually unchanged for the remainder of 2006 at 1.5% and will rise to 2.6% by the end of September 2007.

Measured on a dollar volume basis, Moody's global speculative-grade default rate fell more sharply, to 2.1% for the third quarter ended in September from 4% for the 12-month period ended in June.

The agency attributed the substantial decline to several very large defaults in September 2005 passing out of the numerator of the default rate, including last year's biggest default, Charter Communications Holdings, LLC, and two U.S. airlines, Delta Air Lines, Inc. and Northwest Airlines Corp.

The dollar-weighted default rate is also significantly down from the 3.8% rate seen at the beginning of the year.

Five corporate bond issuers rated by Moody's defaulted in the third quarter. In comparison, the first quarter of 2006 saw three bond defaults, and six issuers defaulted in the second quarter.

In the month of September there were two corporate bond defaults: Charter Communications, Inc. ($450 million) and Premier Entertainment Biloxi LLC ($160 million).

All of the 14 corporate bond defaults so far this year have been by issuers based in the United States except for France-based Global Automotive Logistics SAS, the agency said. Of the 24 defaults in the first three quarters of 2005, 21 were from the United States, two were from Sweden and one was from Brazil.

In terms of defaulted volume, a total of $901 million of bonds were recorded in the third quarter of 2006, down from $1.4 billion in the second quarter and down from $1.9 billion in the first quarter.

The agency said that in addition to the slowing pace in the number of defaults, 2006 has seen a decline in the average size of default. The average default size for the year to date is roughly $300 million per issuer, less than half of the $725 million average size in 2005 and roughly equivalent to the long-run average since 1980. Dana Corp. is the largest default in 2006 so far at $1.6 billion.

Among U.S. speculative-grade issuers, the issuer-weighted default rate finished the third quarter at 1.9%, down from 2.4% for the previous quarter and the prior year.

Measured on a dollar volume basis, the default rate among U.S. speculative-grade issuers dropped significantly, to 2.4% at the end of the third quarter from 4.6% for the 12 months ended in June. At the beginning of 2006, the U.S. speculative-grade dollar-weighted default rate was 4.3%.

The issuer- and dollar-weighted speculative-grade default rates for Europe remained unchanged at 0.5% and 1.1%, respectively. A year ago, the issuer- and dollar-weighted European default rates were noticeably higher at 1.6% and 1.4%, respectively.

Loan defaults

In the leveraged loan market, Moody's recorded no loan issuer defaults in the third quarter, leaving the year-to-date loan default counts unchanged from the previous quarter of five - four in the United State and one in France. For the comparable period in 2005, there were six loan defaults, all by U.S. issuers.

The agency said defaulted loans total $1.4 billion for the year to date, much lower than the $4 billion year-to-date total for the same period of last year.

Default rates among U.S. speculative-grade loan issuers finished at 1% for the 12-month period ended in September. The current loan default rate is down from the 1.5% level recorded at the end of the second quarter and one year prior.

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