Global Corporate Defaults Slowed in 2011, Facing Upward Pressure in 2012
Despite great uncertainties surrounding the European sovereign debt crisis in 2011, corporate defaults were surprisingly few, said Moody’s Investors Service in its 25th annual default study that updates defaults and recovery rates for global corporate issuers.
“Only 35 Moody’s-rated corporate issuers defaulted on a total of US$36bn of debt in 2011, the lowest in four years,” said Sharon Ou, author of the report. “This modest default number stemmed mostly from ample liquidity, low interest rates and the recent surge of refinancing that addressed looming maturities.”
The 2011 defaults were led by the Transportation sector, accounting for seven defaults including American Airlines. By region, defaults remained concentrated in North America with 25 issuers default on US$26bn of debt and the remaining 10 from Europe, with US$10bn of debt affected.
After a more positive start to 2011, the second half of the year saw greater turbulence in the financial markets as Greece hovered near default and Moody’s placed the US’ Aaa rating on watch for downgrade, notes the report.
The increasing risk deriving from the European crisis is reflected in Moody’s quarterly ratings drift – which fell from -2.6% to -5.1% in the last quarter of 2011 – with credit quality deterioration much more severe in Europe than in North America. Quarterly ratings drift is measured by the rating upgrade rate minus the rating downgrade rate.
Moody’s global speculative-grade default rate ended 2011 at 1.8%, down from 2010’s year-end level of 3.2%. The default rate for all Moody’s-rated corporate issuers fell to 0.8% at the end of 2011 from 1.3% at year-end 2010. Both results correspond closely with the rating agency’s one-year-ago forecasts of 1.9% and 0.8%, respectively.
Looking ahead, Moody’s default rate forecasting model predicts a modest rise in the global default rate this year, under the baseline macroeconomic scenario. The default rate is anticipated to rise to 2.8% by December 2012, a level below the historical average of 4.8%.
“The declining trend in high yield default rate, which has lasted for over two years, has probably ended,” said Albert Metz, managing director of credit policy research. “The current weak macroeconomic climate, falling consumer confidence, and deteriorating corporate credit quality are expected to put upward pressure on the default rate.”
In a more pessimistic scenario, which assumes that the sovereign debt problem materialise and turn the global economy into a double dip recession, the default rate can rise to 8.1%, still below the 2008-2009 peak of 13.6%, said Moody’s.