Moody’s reports that global junk bond defaults have doubled in the first five months of 2008 compared with their level at year end 2007 and forecasts that the default rate at the end of 2008 will be 5 times the level of year-end 2007. Those rates were 1.0% at year end 2007, rose to 2.0% in May, and are projected to reach 5.0% by year end. For the US alone, defaults were 2.3% in May and expected to reach 5.8% by year end.
While the current default rate of global default rate of 2.0% isn’t high by any standards, the US, the home of a large number of below-investment-grade issuers (Japan, the number two economy, has little in the way of corporate bonds) has had a particularly low default rate in recent years, in part due to low interest rates, in part due to the ease of refinancing. Historically, US corporate defaults have averaged 3.8% but fell to 0.8% in this cycle. During the last two recessions, the default rate rose to over 15%.
Even though I see no reason to believe this downturn will be kinder to bondholders than past ones, the global default rate is unlikely to reach the peak rate in the US. Even if we have a global slowdown, other countries are likely to enter and exit it on a somewhat different timetable than ours.
By contrast, while Moody’s distressed bond index showed some improvement during recent months, its level is much higher than last year. From Moody’s:
Moody’s speculative-grade corporate distress index- which measures the percentage of rated issuers that have debt trading at distressed levels- edged lower to 17.5% in May from 21.4% in April and 24.4% in March. This is the second time that the index has declined since last summer. Nevertheless, the current level is much higher than the level of 1.3% in June 2007.