The default rate for European speculative-grade corporate bonds rose to 1.9% last year from 1.1% in 2005 on an issuer-weighted basis, according to Moody's Investors Service. On a debt volume-weighted basis it went to 1.2% last year from 0.4% in 2005. The rise is in contrast to the declining default rate globally, which dropped to 1.7% from 1.9% on an issuer-weighted basis. In the U.S., the issuer-weighted speculative grade default rate fell to 1.8% last year from 2.3% in 2005, according to the ratings agency.
Andrea Zazzarelli, associate director of corporate default research, said the rise could be attributed to economic conditions. As the economies in Europe have grown stronger, the central banks hiked interest rates making payments more expensive. "Issuers that have been defaulting in 2006 are those that have suffered from these higher interest rates," he said. Also, as conditions have improved, the comfort with piling on debt at lower rating levels has increased.
Moody's predicts the rate of default for global speculative-grade corporate bond issuers will rise to 2.6% by the end of 2007. Zazzarelli said in the report he anticipates there will be slower economic growth and a gradual dip in liquidity.
Globally last year, 27 Moody's rated corporate bond issuers defaulted on $7.8 billion of bonds. In 2005, 34 issuers defaulted on $29 billion of debt. Of the 27, four were European credits.