Global default rate at lowest level in two decades, sharp rise in 2008

Moody’s global speculative-grade default rate drifted lower in December, closing 2007 at 0.9%, down from its level of 1.7% a year ago, Moody’s Investors Service reported today. The global default rate is now at its lowest level since December 1981 when it stood at 0.7%.

“We believe December 2007 likely marks the low point of the current default rate cycle as several issuers have missed interest payments in recent weeks, which should translate into upward pressure on default rates as the 30-day grace periods on these issuers’ bonds expire and they become actual defaulters,” said Moody’s Director of Corporate Default Research Kenneth Emery.

Moody’s default rate forecasting model predicts that the global speculative-grade default rate will rise sharply to 4.8 % by the end of this year. By the end of 2009, the model forecasts the global default rate will reach its’ historical average of 5%.

“Both weaker macroeconomic fundamentals and a modest worsening in the ratings mix of Moody’s speculative-grade issuers are contributing to recent increases in forecasted default rates for year-end 2008,” added Emery.

Consistent with upward pressure on default rates over the next year, Moody’s speculative-grade corporate distress index, which measures the percentage of rated issuers that have debt trading at distressed levels, reached 11.5% in December, the highest level since July 2003. A year ago, the index stood at 4.2%.

During December, the U.S. speculative-grade default rate also edged lower, finishing at 0.9% in 2007, also down from 1.7% at the end of 2006.

The last time the U.S. default rate was lower was December 1981, when it came in at 0.7%.

No Moody’s-rated corporate issuers defaulted in the month of December, leaving a total of 16 defaulters for the entire year in 2007.

Measured on a dollar volume basis, the global speculative-grade bond default rate closed at 0.6% in 2007, down more than 46% from 1.1% at the end of 2006.

Among U.S. speculative-grade issuers, the dollar-weighted bond default rate ended the year at 0.6%, down 44% from the 1.0% level recorded at the end of 2006.

No Moody’s-rated leverage loan issuers defaulted in December. The trailing 12-month leveraged loan default rate ended at 0.1% in 2007, down from 0.6% at the end of 2006.