Junk Default Rate Falls to Two-Year Low, Moody’s Says

The global speculative-grade default rate fell to a two-year low of 3.3 percent last month at Moody’s Investors Service, as junk-rated borrowers tapped the bond market at a record pace.

The rate declined from 3.7 percent in October and 13.6 percent a year ago, Moody’s said in a report today. Defaults will fall to 2.9 percent by year-end and 1.8 percent by November 2011, according to the report. That compares with a forecast last month of 2.8 percent by year-end and 1.9 percent by October 2011.

“Defaults continue to come in near, but generally below, our expectations,” Albert Metz, Moody’s New York-based director of credit policy research, said in a statement. “Issuers are able to find the liquidity they need when they need it.”

Corporate defaults are falling as profits surge, the economy recovers and debt markets allow even the riskiest borrowers to raise record amounts of cash. Junk-rated companies have sold $97.8 billion of bonds globally since September, putting issuance on pace to beat the record $99.8 billion raised in the third quarter, according to data compiled by Bloomberg.

In the U.S., the pace of defaults on junk bonds declined to 3.5 percent from 3.6 percent, while the rate in Europe dropped to 1.9 percent from 2.8 percent, according to the report. Moody’s forecasts a drop in the U.S. rate to 3.1 percent by year-end and an increase in Europe to 2 percent.

The percentage of bonds trading at distressed levels fell to 11.5 percent from 14.1 percent in October, according to the report. The so-called distress ratio compares with 24 percent a year ago. Distressed debt trades at yields of at least 10 percentage points more than government bonds.

High-yield, high-risk, or junk, debt is rated below Baa3 by Moody’s and BBB- by Standard & Poor’s. A basis point is 0.01 percentage point.

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