Moody's Investors Service predicts the high-yield default rate will reach 9.5% by the end of the year, a nearly 67% increase over last year, and Standard & Poor's sees a default rate of over 8% by the end of this year. Furthermore, Moody's says defaults will continue rising into 2002 on the way to peaking in March at 10.1%. David Hamilton, a Moody's risk management analyst, says several factors contribute to the agency's forecast. He says Moody's anticipates the summer will be quiet for speculative grade defaults, but will be followed by a surge in defaults toward the end of the year--a pattern similar to last year when most defaults occurred at year-end. In 2000, the default rate hit 5.7%. Moody's had predicted it would come in at 6%. Diane Vazza, high-yield analyst at S&P, said "We're starting to get some positive economic figures that support the argument for a peak by the end of this year." As of the end of the first quarter, defaults were running at just over 6%, Vazza said.
Hamilton added that high-yield new issuers that entered the market in 1997-98 are now passing critical age: either the bonds will default or they will survive by next year, he says. Another reason is that credit quality has bottomed. Hamilton notes that issuers that rate between single-B and single-C--the lower spectrum of the junk bond range-- represent 81% of the market against 70% a decade ago. However, after next year's peak, default should stabilize and decrease, roughly assuming an upside-down "V" shape, concludes Hamilton.