Global speculative-grade default rate picked to soar

International rating agency Moodys is expecting the speculative-grade default rate to balloon out this year.

Thursday, January 15th 2009, 7:08AM

It says that the global speculative-grade default rate finished 2008 at 4.0%, more than quadruple the closing level of 0.9% in the previous year.

Moodys now expects that the global default rate will continue to rise this year, likely climbing above 12% by the end of 2009.

"Global economic conditions are now substantially weaker and more perilous than they were in the two previous credit cycles of 1990-91 and 2001-02. Consequently, Moody's expects that the speculative-grade default rate is likely to exceed the 12% peak it reached in 1991," Moody's Director of Corporate Default Research Kenneth Emery says.

Its quantitative default rate forecasting model now predicts that the global default rate will reach 15.1% by year-end. The model's forecast increased from 10.4% last month due to a jump in the expected path for the US unemployment rate over the next year.

The model forecast implies approximately 300 corporate defaulters over the next 12 months, or 25 defaulters a month.

"Moody's quantitative model forecast is being driven by unprecedented corporate spread levels, a record low mix of corporate credit ratings, and expectations of a 9% US unemployment rate by the end of 2009," Emery says. "Because the model drivers are outside of recent historical experience and future economic conditions remain highly uncertain, the default forecast is subject to some margin of error in this environment."

Measured on a dollar volume basis, the global speculative-grade bond default rate closed at 5.7% in 2008, almost a ten-fold increase from the level of 0.6% at the end of 2007.

While Moody's is picking a default of 15.3% in the US, it is even worse in Europe where it expects the rate to rise even more sharply to 18.3%.

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