Global Default Rate on Junk Debt to Drop to 2.7% This Year, Moody's Says

The global default rate on high- yield, or junk, debt will fall to 2.7 percent by the end of this year before dropping to 2 percent a year from now, according to Moody’s Investors Service.

Defaults worldwide declined to 5 percent in August from 5.5 percent in the previous month, Moody’s said in a report today. A year ago, the rate was at 12.3 percent.

“Defaults continue, but at a very slow pace,” said Albert Metz, director of credit policy research at the New York-based rating company. “Following the apparent stability in the pricing of high-yield corporate debt, we expect to see reduced defaults going forward as well.”

In the U.S., defaults fell to 5.1 percent last month from 5.4 percent in July, while a year ago the rate was at 13.2 percent, Moody’s said. The pace of defaults in the world’s largest economy will decline to 2.9 percent by December, according to the report.

The European default rate declined to 4.8 percent in August from 6.2 percent the prior month, according to a separate report. The rate will be 2.3 percent by year-end, Moody’s forecast.

Defaults will be highest in the consumer transportation industry in the U.S. and the durable consumer goods sector in Europe, Moody’s said.

Speculative-grade, or junk, bonds are rated below Baa3 by Moody’s or BBB- by Standard & Poor’s.

In the U.S. leveraged loan market, the default rate dropped to 5 percent in August from 5.2 percent in July, compared with 10 percent a year ago, according to Moody’s.

To contact the reporter and editor responsible for this story: Paul Armstrong in London at parmstrong10@bloomberg.net

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