Bond default rates still at record lows -- for now

Moody's records the lowest speculative-grade default rate for December since 1981, but substantial increases are expected in the next couple of years.
MoodyÆs has stated that its global speculative-grade default rate dropped to 0.9% in December, its lowest level since December 1981 when it stood at 0.7%, according to a report released this week. This is down from 1.7% a year ago.

Only 16 MoodyÆs-rated issuers defaulted in 2007, compared to 31 in 2006.

ôWe believe December 2007 likely marks the low point of the current default rate cycle as several issuers have missed interest payments in recent weeks," says MoodyÆs director of corporate default research, Kenneth Emery. ôThis should translate into upward pressure on default rates as the 30-day grace periods on these issuersÆ bonds expire and they become actual defaultersö.

The figures reflect the time-lag between the beginning of an economic downturn and the actual moment at which companies begin to experience financial difficulties. This period is usually in the area of one to three years. However, according to Terry Chan, senior director and credit officer Asia-Pacific at Standard and Poor's, despite the number of issuers defaulting being lower overall than in 2006, the amount of defaulting debt is higher in value. This could be due to easier access to credit which has allowed companies to leverage themselves more aggressively.

Moody's predicts the global speculative-grade default rate to rise to 4.8% by the end of 2008, and expects it to reach its historical average of 5% by 2009, as a result of weaker macroeconomic fundamentals, and a ômodest worsening in the ratings mix of MoodyÆs speculative-grade issuersö.

In line with forecast increases in default rates over the next year, the agency's speculative-grade corporate distress index, which measures the percentage of rated issuers that have debt trading at distressed levels, reached 11.5% in December, the highest level since July 2003. In the same period last year, this figure stood at 4.2%.

Despite the fact that the subprime crisis and subsequent credit crunch has had relatively little impact in Asia, the effects of the regionÆs strong growth in recent years will be diminished if interest costs increase as a result of tight liquidity, says Moody's. Although such liquidity worries are still minimal, the current state of the cross-border debt market and its contagion on the rest of the capital markets are and will remain a concern.

Disruptions emerged in Asian corporates in the fourth quarter with the number of companies on negative outlook rising sharply to 14 in the last three months of the year, from eight at the end of the second quarter and nine at the end of the third.

An economic slowdown in the US will, at a minimum, affect issuers that generate revenue from the US market, continues the agency. Highly-leveraged companies or those with weak credit profiles will face financial challenges, and within Asia the technology/semiconductor and trading sectors are the two that are the most exposed, while Indian exporters will face continued foreign exchange volatility. This may affect corporates engaging in speculative currency management. On the other hand, continued appreciation of the rupee may spur Indian corporates to aggressive debt expansion, which would weaken their credit profiles.

However, thanks to continued momentum from strong growth, the ratings agency doesn't expect the impact of a US recession to be devastating to the region, at least in 2008.
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