Total dollar volumes of syndicated loan defaults increased in 2005, according to Moody's Investors Service. Although total dollar volume increased significantly, the actual number of companies defaulting increased only slightly. Last year 29 issuers defaulted on about $12.9 billion of syndicated bank loans, up from 24 issuers on about $6.3 billion in 2004. Moody's predicts the rate of defaults on loans to increase moderately by the end of this year. The current default rate for speculative-grade loans is 1.8%, up from 1.6% in 2004.
Moody's forecasting model for global speculative-grade bond default ratings predicts the default rate will rise from its 1.9% level to 3.3% by the end of 2006. The ratings agency explains that historically, loan default rates are about 20% lower than bond default rates, thus it expects a loan default rate of about 2.6% by the end of the year.
Various trends affect Moody's forecast, including the credit quality of speculative-grade issuers, which remained steady. Also affecting the forecast is the ratio of ratings downgrades to ratings upgrades among issuers rated speculative grade, which increased to 1.1 from 0.9 in 2004 but remained below the 2003 ratio of 1.8:1. Other factors include the rate of GDP growth, which Moody's predicts will slow, impacting corporate profitability and the ability to pay back debt obligations.
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 (CIN, 2/6).
The ratings agency says that both loan and bond defaults were concentrated in the automotive, airline and affiliated power industries. In 2005, six automotive companies defaulted on $4.9 billion of Moody's rated bank loans; two airlines defaulted on $1.7 billion in loans and two power companies defaulted on $1.7 billion in loans. The largest loan defaults were Delphi Corp. with $2.8 billion in bank debt and Northwest Airlines with $1.1 billion in bank debt. Charter Communications Holdings was the largest default in 2005, with bonds totaling $6.9 billion. The average size of defaults in 2005 was $905 million, up from $457 million in 2004.
Kenneth Emery, v.p. and senior credit officer at Moody's, said those industries may remain the most troubled in terms of outlook, but the default rate forecasting does not point to widespread material deterioration of credit quality. He added, however, that he "wouldn't be surprised if defaults do remain constrained to a number of these more troubled industries." J.L. French, a global designer and manufacturer of engineered aluminum automotive parts, entered voluntary Chapter 11 on Feb. 10.