The global speculative-grade default rate continued its downward path in the second quarter of 2010, sliding to 6.1 percent from a level of 10.0 percent in the previous quarter, said Moody's Investors Service in its latest monthly default report. A year ago, the global default rate stood at 11.1 percent, Moody's default rate forecasting model now predicts that the global speculative-grade default rate will fall to 2.4 percent by the end of this year before declining to 1.8 percent by the second quarter of 2011. “Given the indicators in the market, we expect the decline in default rates to continue through the end of this year. However, uncertainty is elevated as Europe continues to address sovereign debt issues that could impact the debt market,” said Albert Metz, Moody's Director of Credit Policy Research. In the US, the speculative-grade default rate ended the second quarter at 6.3 percent, down from 11.0 percent in the previous quarter. At this time last year, the US default rate stood at 12.1 percent. The dollar-weighted speculative-grade bond default rate in the US ended the second quarter at 3.0 percent, while the European dollar-weighted speculative-grade bond default rate fell from 5.8 percent in the first quarter to 3.4 percent in the second quarter of 2010. The comparable rate for the US was 11.3 percent in the prior quarter and the US and European speculative-grade bond default rate stood at 18.4 percent and 7.8 percent, respectively. Among US speculative-grade issuers, Moody's forecasting model foresees the default rate falling to 2.7 percent by the end of the year. In Europe, the forecasting model projects the speculative-grade default rate will decline to 1.4 percent. A total of 26 Moody's-rated corporate debt issuers have defaulted so far this year, of which nine were recorded in the second quarter. In comparison, there were 90 and 85 defaults in the first and second quarter of last year, respectively. Seven out of the second quarter's defaults were by North American issuers. The remaining defaulters came from Europe and South America. Across industries over the coming year, default rates are expected to be highest in the Business Service sector in the US and the Durable Consumer Goods sector in Europe. Measured on a dollar volume basis, the global speculative-grade bond default rate closed at 3.1 percent in the second quarter, down noticeably from the 10.3 percent level from the previous quarter. Last year, the global dollar-weighted default rate was even higher at 17.1 percent. “The reduction in the dollar-weighted bond default rate is primarily due to a number of large defaulters moving out of the trailing twelve-month window such as General Motor Corporation and Ford Motor Company,” Metz said. Moody's speculative-grade corporate distress index - which measures the percentage of rated issuers that have debt trading at distressed levels - came in at 17.1 percent at the end of the second quarter, unchanged from the level in the previous quarter. A year ago, the index was much higher at 40.4 percent. In the leveraged loan market, a total of four Moody's-rated loan defaulters were recorded in the second quarter, lifting the year-to-date loan default count to 15. All of the second quarter's loan defaulters were US issuers. In comparison, 45 loan issuers defaulted in the second quarter of last year, 40 of which were from the US. The trailing 12 month US leveraged loan default rate ended the second quarter of 2010 at 6.1 percent, down from 10.4 percent in the previous quarter and 9.1 percent from a year ago.
