Moody's: sovereign issuers show lower default rates than corporate issuers

By Angela McDaniels

Seattle, April 12 - Default rates for sovereign domestic- and foreign-currency bond issuers between 1983 and 2005 have been lower than those for similarly rated corporate issuers and the average debt recovery rate on defaulted sovereign bonds has been higher, Moody's Investors Service said.

"This is true for both investment-grade and speculative-grade issuers and over both five-year and 10-year horizons," vice president Praveen Varma, lead author of Moody's "Default and Recovery Rates of Sovereign Bond Issuers, 1983 to 2005" report, said in an agency release.

Despite several currency crises and other internal and external shocks, only 11 rated sovereign bond issuers have defaulted since 1983, the agency said, and no sovereign issuer rated A or higher defaulted on its bonds. For Ba and B rated issuers, sovereign default rates were roughly half those of corporates.

Moody's said that sovereigns with the lowest 15% of ratings accounted for 100% of all sovereign defaults within a year. By contrast, the bottom 15% of all corporate ratings accounted for roughly 80% of all corporate defaults within one year.

The agency rates over 100 sovereigns, of which 92 have rated bonds outstanding. Like corporates, roughly two-thirds of all sovereigns are rated investment grade. Unlike corporates, a large share of sovereign debt carries Moody's highest rating, Aaa.

Recoveries on bonds defaulted on over the last three years have generally been higher than for earlier defaults, matching a trend also seen among the corporates. The two largest defaulters in the study, Russia and Argentina, both saw some of the lowest recovery rates for their bonds, but Moody's said these rates are still similar to the average corporate experience.

Moody's also said that spreads on sovereign bonds are generally tighter than for similarly rated corporate bonds, suggesting that markets already factor the better recoveries and default rates into pricing.

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