European spec-grade defaults continue to increase in Q4 2009

Global and US default rates decrease for first time since January 2008

The European speculative-grade default rate increased to 10.2% in Q4 2009 from 9.7% in Q3, Moody's Investors Service said in its monthly default report. The current European default rate is off from its November peak of 10.5%, but well above 2008's closing level of 2.1%.
The US rate, however, decreased slightly to 13.2% in Q4 from 13.4% in Q3 (peaking at 13.8% in November). A year ago, the rate stood at 4.7%. The global rate also declined in Q4, to 12.5% from 12.6% in Q3, also peaking in November (at 12.9%). A year ago, the global default rate stood at 4.2%. The current U.S. and global rates both surpassed their comparable peaks in 1991 and 2002.
A total of 32 Moody's-rated corporate debt issuers defaulted in Q4, which increased the 2009 default total to a record high of 266 issuers. In comparison, only 105 defaults were recorded in 2008. Of the 266 defaults in 2009, 92 (or 35%) were triggered by distressed exchanges, led by Ford Motor Company.
Moody's default rate forecasting model now predicts, under the baseline scenario, that the European speculative-grade default rate will ease to 2.7% by the end of 2010, while the US rate is set to decline to 3.6% a year from now. Globally, the rating agency forecasts that the speculative-grade default rate will fall sharply to 3.3% by the end of 2010. The rating agency expects the decline to be more rapid in H1 2010 than in H2. Under the pessimistic scenario, the global default rate is projected to finish at 7.1% in 2010.
"With the pace of defaults down sharply during the past several months, it is likely that the global default rate has now reached its cyclical peak for this credit cycle. If high yield credit spreads remain at or below current levels, we expect the default rate will fall sharply in 2010. The main risk to this forecast is that the global economic recovery falters and companies lose their access to the high yield bond markets, which would result in a default rate that declines only modestly from current levels," said Moody's Director of Default Research Kenneth Emery.
The Media industry was the worst performer in 2009, with 45 issuers in that sector defaulting. The Automotive and Hotel/Gaming/Leisure industries were the next worse, with 19 defaults in each. Across regions, 205 (or 77%) of the 2009 defaulters were based in North America, while 30 (11%) were from Europe. The remaining defaulters were located in Asia and Latin America.
Measured on a dollar volume basis, the European speculative-grade bond default rate rose to 8.9% in Q4 2009 (peaking at 9.7% in November) from 8.0% in Q3. Moody's notes that the European dollar-weighted default rate was much lower in Q4 2008, at only 1.1%.
In the US, the dollar-weighted speculative-grade bond default rate stood at 16.5% in Q4 2009, down from Q3's level of 19.7% and the November peak of 20.0%. The comparable rate was 6.7% in Q4 2008. Globally, the dollar-weighted speculative-grade bond default rate rose to 15.6% in Q4 2009 (also peaking in November, at 18.9%) from a revised 18.3% in Q3. A year ago, the global speculative-grade bond default rate was much lower, at 5.9%.
Moody's distressed index improved to 18.8% in Q4 2009 from Q3's level of 28.5%. A year ago, the index was considerably higher, at 54.1%.
In the leveraged loan market, 13 Moody's-rated loan defaulters were recorded in Q4 2009, taking the yearly loan default count to 113. Issuers from North America accounted for 108 (or 96%) of 2009's loan defaulters. In comparison, only 34 loan issuers defaulted in 2008, all of which were North American. The trailing 12-month US leveraged loan default rate increased to 11.6% in Q4 2009, up from 10.5% in Q3, but down from November's peak of 11.7%. In 2008, the loan default rate ended at 3.4%.
Across industries over the coming year, Moody's expects default rates to be highest in the Business Service sector in Europe and the Consumer Transportation sector in the US.