Moody’s Predicts Default Rate Rise

Moody’s says the global speculative-grade default rate will rise sharply to 4.6% by the end of this year and increase further to 4.8% by January 2009. The long-term average is 4.5% since 1983. The rate rose to 1.1% at the end of January, up from a closing level of 0.9% for 2007. “The recent increase comes off of a two-decade record low level reached in November 2007, when the speculative-grade default rate came in just below 0.9%,” says the agency. “Importantly, the model’s baseline forecast does not assume a US recession. If a significant recession were to occur, default rates could reach over 10% as they have in previous recessions,” says Moody’s director of corporate default research Kenneth Emery. Last year saw a spike in junk LatAm corporate issuance and a rise in the default rate will likely affect pricing. In an extreme scenario, more speculative names could be shut out of debt markets completely.