Moody’s: 2008 marks turning point for credit cycle

New York-based rating agency Moody’s Investors Service said the global corporate default rate had reached its lowest level in two decades by the end of 2007, although it expected a “sharp rise” in 2008.

In its monthly default report, Moody’s said the global speculative-grade default rate among corporates was at 0.9% in December 2007. This was down from 1.7% in December 2006 and its lowest level since December 1981.

Speculative-grade defaults in the US were down to 0.9% by December 2007, from 1.7% a year earlier. In Europe, the rate fell to 1.2%, from 2.6% a year earlier.

But Moody’s warned this trend would not continue, with a sharp rise in global corporate defaults expected over the coming year. “We believe December 2007 likely marks the low point of the current default rate cycle, as several issuers have missed payments in recent weeks, which should translate into upward pressure on default rates,” said Kenneth Emery, the agency’s director of corporate default research.

The agency predicts the global speculative-grade default rate will increase to 4.8% by the end of 2008, and expects it to revert to its 5% historical average by the end of 2009.

Among US speculative-grade issuers, Moody’s forecasts the default rate will rise to 5.3% by the end of 2008, an increase of 4.4 percentage points over the figure for December 2007. In Europe, it said the speculative-grade default rate would increase to 3.5%, nearly triple its current level.

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