Aug. 7 (Bloomberg) -- The global default rate for speculative-grade company bonds may rise to as much as 10 percent over the next year as the economy slows, according to Moody's Investors Service.

Defaults may reach 6.3 percent in 12 months, the highest in more than five years, and could be higher should the housing slump lead to a ``protracted U.S. recession,'' the New York- based rating company said in a report today. The failure rate increased to 2.5 percent in July from 1.5 percent a year ago.

Companies missing payments ``increased considerably in July as economic conditions weakened and more companies experienced financial distress,'' said Kenneth Emery, a Moody's director in New York.

A year after losses on U.S. subprime mortgages caused credit markets to seize up, companies are facing the highest borrowing costs since 2003 and consumer confidence near the lowest in at least a decade. Banks around the world have posted more than $490 billion in losses and writedowns since the start of the crisis last year, making them less willing to lend.

Defaults in the U.S. may climb to 5.7 percent by year-end and to 7.2 percent in 12 months, Moody's said. The rate rose ``noticeably'' to 3 percent in July, from 2.5 percent a month earlier and 1.5 percent a year ago.

The rate in Europe is forecast to increase to 2.5 percent by the end of this year, after staying unchanged at 0.7 percent in July. Worldwide the rate increased from a revised 2.1 percent in June, the biggest jump since November.

Airlines, Automakers

French vodka maker Belvedere SA, Ainsworth Lumber Co. Ltd., the unprofitable Vancouver-based forest products company, and nine more companies defaulted globally in July, the most in five years.

So far this year, 48 companies have defaulted, compared with 12 in the same period a year ago, Moody's said.

``It's a different story in 2009 because access to refinancing will become more of a challenge,'' said James Ward, head of European high-yield debt at Axa Investment Managers in Paris.

Airlines in the U.S. are the most vulnerable, Moody's said. In Europe, the ``most troubled'' companies will be producers of durable consumer goods, according to the report.

The chance of General Motors Corp. defaulting is more than 80 percent and for Ford Motor Co. the risk is about 75 percent, according to an analysis by UniCredit SpA based on the cost of five-year credit-default swaps. Combined with Chrysler LLC, the likelihood that one of the top three U.S. automakers will be unable to fund its business is more than 95 percent, the analysts said.

Distressed Borrowers

Six companies defaulted on leveraged loans in July, all of which were in the U.S., Moody's said. The default rate on loans was 2.8 percent, up from 0.3 percent a year ago, Moody's said. High-yield, high-risk or leveraged debt is rated lower than Baa3 by Moody's and BBB- by Standard & Poor's.

Moody's index of distressed borrowers, which shows the percentage of issuers with bonds trading at yields 10 or more percentage points higher than government notes, rose to 20.7 percent in July from 17.8 percent in June. A year ago, the level was 3.1 percent.

The difference between three-month lending rates and overnight indexed swap rates in dollars, euros, pounds and Swiss francs, a measure of money-market dislocation, widened from close to zero as borrowing costs jumped in August last year and haven't narrowed even as central banks have boosted loans to the finance industry.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

Last Updated: August 7, 2008 10:34 EDT