New York, March 18, 2003 — The global speculative-grade bond default rate fell for the ninth straight month in February, to 7.5%, down slightly from 7.6% in January and on target to give this calendar year an overall default rate of 6.9%, Moody’s Investors Service said in a report. Despite the improvement in the default rate, officials at the rating agency urged caution.
“Although credit fundamentals have shifted somewhat toward lower expected default rates, risks of another rise in default rates cannot be completely ruled out,” said David T. Hamilton, director of default research. “Economic wildcards abound: high energy prices, flagging consumer sentiment, and rising unemployment – these signs of macroeconomic weakness might prevent the default rate from falling as significantly as it did following the 1990-1991 peak.”
Although the default rate is expected to fall by 1.4% over the course of 2003, Moody’s latest forecast does not indicate further improvement in the default rate beyond the end of 2003. The global issuer-weighted speculative-grade default rate is expected to remain near 6.9% through February 2004.
The pace of credit rating downgrades thus far in 2003 has slowed relative to that of 2002: approximately two issuers have been downgraded for every one upgraded. In 2002, that ratio was nearly 5 to 1. The increasing percentage of issuers on review for downgrade suggests, however, that that improvement may not persist: through the first two months of 2003, 43 issuers are on review for downgrade, with only 3 issuers on review for upgrade.
Notably, the issuer-weighted default rate for US speculative-grade issuers rose to 6.1% in February, from 6.0% in the previous month. It was the first such increase in the US speculative-grade default rate since March 2002. The issuer-weighted default rate for non-US speculative-grade issuers fell to 11% in February from 11.9% in January.
Should the speculative-grade default rate reverse course, Hamilton added, it is highly unlikely that the global speculative-grade default rate will approach the 10.7% peak set in January 2002, even in a “worst case” scenario. “We’ve seen the peak of the default rate in this credit cycle.”
In February, nine corporate bond issuers defaulted on a total of US $2.9 billion, compared with six issuers defaulting on $1.8 billion of bonds in January. Moody’s default rate forecast indicates that an average of 8 corporate bond issuers will default per month in 2003.
The largest defaulters in February were British Energy, $658 million, and Asarco Incorporated, $540 million.
The average size of default thus far in 2003 is $311 million, substantially below the record $1.7 billion average default in 2002 that was swollen by a record 36 defaulters that defaulted on over $1 billion apiece, including WorldCom, Inc.
Moody’s expects a continuation in the fall of the average size of default, which will lead to a substantial narrowing of the gap between default rates measured in dollars terms and default rates measured as a percentage of issuers.
“A narrowing of the gap between dollar volume and issuer-weighted default rates is important,” Hamilton said. “Default rates measured on a dollar-volume basis are comparable to portfolio default rates for investors in high-yield bonds. Even though Moody’s global speculative-grade default rate fell last year when measured by the number of issuers defaulting (to 141 defaulting issuers, down from 186 in 2001), the dollar-volume reached an all-time peak in 2002 ($163 billion). This difference explains why investors felt defaults getting worse, even as the probability of default was falling.”
After peaking at 21% in 2002, Moody’s global dollar-volume speculative-grade default rate fell to 18.4% in January and to 16.8% in February. For US-domiciled issuers, the speculative-grade dollar volume default rate has fallen from 16.1% at the end of 2002 to 10.2% in February 2003.