Default Rate May Have Reached Cyclical Low

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Default Rate May Have Reached Cyclical Low

The global default rate for speculative-grade credit may have bottomed out or will do so by the end of the quarter, according to David Hamilton, director of corporate default research at Moody's Investors Service.

The global default rate for speculative-grade credit may have bottomed out or will do so by the end of the quarter, according to David Hamilton, director of corporate default research at Moody's Investors Service. The global corporate speculative-grade default rate stayed at 2.3% from December through January. "The model is saying it's bottoming either in March or April, but there's room for error and as the interpreter of the model, I think it could be now or sometime by the end of the quarter," said Hamilton. Moody's model predicts the cyclical low is 2.2%.

Hamilton expects the default rate to then edge higher and finish this year at around 3%, signifying a cyclical turnaround but remaining below the historical average of 4.9%. Longer-term, he mentioned the big component of Caa-rated issuance last year, which tends to default sooner, suggests the default rate will continue to rise next year and peak sometime in 2006. However, Hamilton stressed there is no historical precedent to the current extremely high percentage of Caa paper and he is unsure of the magnitude of its effect on the overall default rate.

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