Moody’s: credit cycle at tipping point

The rate of defaults on speculative-grade corporate debt was at its lowest level for two decades in 2006, but will double in 2007, according to New York-based rating agency Moody’s.

The findings were revealed in the agency’s annual global corporate default study, which includes all corporate issuers rated by Moody’s. The speculative-grade default rate dropped from 1.8% in 2005 to 1.6% in 2006, while defaults across all corporate issuers fell by 0.1% to 0.5%. The speculative-grade default rate is now at its lowest level since 1981, while the default rate overall is at its lowest level since 1996.

However, Moody's forecasts a rise in default rates this year, including an increase of the speculative-grade default rate to 3.1%. David Hamilton, Moody’s director of corporate debt research, said this was partly due to riskier debt issued in 2003-2004 reaching the age when default risk has historically been highest. The agency said average recovery rates, which peaked at 58.3% in 2006, were also likely to fall.

For 2006, Moody’s reported the automobile parts sector accounted for a third of the total volume of defaulted bonds. While 26 of the year’s 33 defaults occurred in the US, a larger proportion of non-US issuers also defaulted in 2006 than in 2005, including five in Europe.