High-Yield Defaults Could Quadruple

Here’s a stunning story. Moody’s says that high-yield bond defaults will quadruple next year, and that’s assuming the economy doesn’t go into a recession. If it does fall into a recession, defaults could rise tenfold.

The global default rate will rise to 4.2 percent by November from 1 percent now, the lowest since 1981, Kenneth Emery, director of corporate default research at Moody’s, wrote in the report e-mailed today. His forecast is based on an assumption the U.S. economy slows without falling into recession. In a recession, defaults may approach 10 percent, he said.
“We’re certainly looking for an economic slowdown next year and a pick-up in default rates,” said Simon Ballard, macro credit strategist at ABN Amro Asset Management in London. “Any default rate above 3.5 percent would require a very bearish outlook on the U.S. economy.”
More than one in 10 of the borrowers to which Moody’s assigns ratings are treated as “distressed” by bond traders, the highest proportion since global defaults reached 10.5 percent in 2002. At that time, bondholders charged as much as 11.4 percentage points above government rates to buy high-risk, high-yield debt, double the current average of 5.73 percentage points, according to Merrill Lynch & Co. indexes.

Posted by on December 6th, 2007 at 9:34 am


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