Defaults hit new record levels, says Moody’s

In its 15th annual survey of global corporate defaults, Moody’s said 212 of its rated issuers defaulted on a total $135 billion of debt in 2001, with the dollar volume of the 10 largest defaults in 2001 totalling $46.5 billion, a 39% increase from 2000. Rating downgrades exceeded rating upgrades by 1.9:1 last year.

The largest corporate bond defaults were: Enron ($9.9 billion), Arizona-based financial services firm, Finova Capital ($6.3 billion), Pacific Gas & Electric ($5 billion), Virginia-based broadband company, XO Communications ($4.9 billion), and Southern California Edison ($3.6 billion). The two largest-defaulting industry categories in 2001 by dollar volume were the energy and telecommunications sectors.

The global speculative-grade bond default rate almost doubled last year, reaching a 10-year high of 10.2%. In January 2001, Moody’s predicted that the default rate would end the year at 9.5%. The default rate for all rated corporate issuers globally rose to 3.7% in 2001, well above the 1.4% average default rate since 1980.

At 21 cents to the dollar, the average recovery rate of defaulted bonds in 2001 was down from 25 cents in 2000, and well below the lows of the last recession when recoveries bottomed out at 27 cents to the dollar. The average over the last 20 years was 40 cents per dollar of defaulted debt.

More optimistically, Moody’s predicts that the default rate for all rated companies will peak in the first quarter of 2002 near its 2001 year-end level, and will fall over the rest of the year to end at 2.1%. For speculative grade-rated issuers, Moody’s expects the default rate to decline from its 10.2% 2001 rate to 6.8% by the end of 2002.

“Historical cumulative credit loss rates have been higher for lower-rated issuers, at all possible investment horizons, demonstrating that Moody’s rating system effectively differentiates credit risk,” claimed David Hamilton, director of default research at Moody’s in New York.

But Moody’s, along with Standard & Poor’s and Fitch, has faced substantial criticism for its failure to downgrade Enron. Long before the agencies downgraded Enron’s ratings, its bonds were trading with sub-investment grade spreads.

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