Moody's Investors Service says the total dollar volume of corporate bond defaults jumped in 2005, even though the number of issuers defaulting on corporate bonds fell for the fourth year in a row. Thirty-two Moody's-rated corporate bond issuers defaulted on a total of $29 billion of bonds in 2005, compared with 36 issuers and a total of $16.5 billion in 2004, the ratings agency says in its 19th annual corporate default study. It expects the rate of corporate defaults to rise in 2006.
The 2006 rise could be due to a slowdown in the pace of economic growth and positive credit rating revisions. David Hamilton, a Moody's v.p. and senior credit officer, said the forecast comes from credit rating variables and micro-economic variables, as well as the flattening of the treasury yield curve. "The fact that there is a rather large number of Caa-rated companies that were issued [those ratings] in 2003, about 30% of new issues were at the lowest tiers of speculative grade, with everything else being equal, the surge of low rated bonds should come home to affect the aggregate default rate."
He said it is difficult to forecast whether defaults will again hit some of the largest companies and could not comment on whether defaults will again be clustered by industry. Moody's predicts that the default rate will rise from 1.9% to 3.3% by the end of 2006.
The most defaults in 2005 occurred in the transportation industry with six, followed by the automobile industry, which includes Delphi Corp. and Collins & Aikman, but does not include Tower Automotive, which had a Moody's issuer rating but did not have rated bonds. The independent power and the chemicals, plastics and rubber industries each had two defaults a piece. Northwest Airlines, Delta Air Lines and Charter Communications were three of the larger companies that defaulted in 2005.