The global speculative-grade bond default rate inched up to 2% in August from 1.8% in July, but Moody's Investors Service does not see any clear indication that credit risk is set for a sharp increase. The rating agency expects the speculative-grade default rate to rise relatively modestly over the next six to 12 months, despite Hurricane Katrina, energy price increases and weaknesses in the airline and auto industries. The rating agency predicts the default rate will end 2005 at 1.8% and rise to 3.1% by the end of August 2006.
"The default rate has been near an eight-year low for the past five months," said David Hamilton, director of corporate default research at Moody's, in an email. "The rating upgrade/downgrade ratio has slowed; and there was a surge in issuance of very low rated debt that is usually indicative of a peak of a boom."
Hurricane Katrina has had little effect on the economy. Hamilton said macroeconomists predict the storm may shave 0.5% off GDP. "Our research, as well as that of the Federal Reserve, shows that economic activity has to seriously slow down before it leads to widespread defaults, and right now that doesn't seem to be in the cards."
In August, four U.S corporate issuers defaulted on $1 billion of bonds. Foamex LP and Foamex Capital Corp. defaulted on $500 million of bonds. Anchor Glass Container Corp. filed for reorganization under Chapter 11, affecting $350 million of bonds. Fedders North America announced it would not make interest payments on $155 million of bonds.
In the first eight months of 2005, 28 corporate issuers defaulted, 15 in the U.S. This compares with 25 defaults in 2004. Year to date, defaulted bonds totaled $4.5 billion, a big drop from $7.1 billion in the same period of 2004. Collins & Aikman's default on $915 million of bonds in May is the largest this year.