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Moody's: global default rate fell to 7.5 per cent in May 2010.

The global speculative-grade default rate continued its downward path in May, sliding to 7.5 per cent in May from 9.0 per cent in April, said Moody's Investors Service in its latest monthly default report. The current default rate is 44 per cent down from its peak of 13.5 per cent in November 2009. A year ago, the global default rate stood at 9.8 per cent.

Moody's default rate forecasting model now predicts that under the baseline scenario, the global speculative-grade default rate will finish this year at 2.4 per cent and then fall to 1.9 per cent a year from now. "This baseline scenario assumes that high yield spread will continue to tighten considerably while the unemployment rate is expected to increase only modestly in the coming year," said Moody's Director of Credit Policy Research Albert Metz.

"Under the pessimistic scenario of a second economic downturn and renewed liquidity pressures, the global default rate may land at 5.6 per cent in December 2010 and return to 10.0 per cent by May 2011," added Metz.

In the US, the speculative-grade default rate dropped from 9.5 per cent in April to 7.9 per cent in May. The US default rate peaked at 14.5 per cent six months ago and stood at 10.9 per cent at this time last year. Meanwhile, the comparable European default rate ended at 6.8 per cent in May, also down from April's level of 7.8 per cent and November 2009's peak of 11.8 per cent.

Among US speculative-grade issuers, Moody's forecasting model foresees the default rate falling to 2.7 per cent in December 2010 under the baseline scenario. In Europe, the forecasting model projects the speculative-grade default rate will decline to 1.5 per cent. If the pessimistic scenario unfolds, the US and European default rate is expected to finish the year at 5.8 per cent and 5.7 per cent, respectively.

Only one company defaulted in May, lifting the year-to-date default count slightly up to 23. In comparison, 145 defaults were recorded in the first five months in 2009, 30 of which were May defaults.

Overall, 21 of this year's defaults were by North American issuers while the rest were from Europe and Asia. Across industries over the coming year, default rates are expected to be highest in the Hotel, Gaming, & Leisure sector in both Europe and the US.

Measured on a dollar volume basis, the US speculative-grade bond default rate ended at 7.4 per cent in May, down from April's level of 9.1 per cent; while in Europe, the comparable rate edged lower from 3.9 per cent in April to 3.4 per cent in May. Globally, the dollar-weighted bond default rate experienced a decline from 8.1 per cent to 6.6 per cent.

Moody's speculative-grade corporate distress index -- which measures the percentage of rated issuers that have debt trading at distressed levels -- came in at 14.9 per cent at the end of May, up from 14.1 per cent in April. A year ago, the index was much higher at 46.7 per cent.

In the leveraged loan market, a total of 13 Moody's-rated loan defaulters were recorded year to date, all by North American issuers. The trailing 12 month US leveraged loan default rate fell from 8.8 per cent in April to 7.2 per cent in May. A year ago, the loan default rate was 7.8 per cent.

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Publication:CPI Financial
Date:Jun 8, 2010
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