European defaults growing, according to Moody’s

The rate of defaults among speculative-grade European corporate bond and loan issuers more than doubled in 2006 and will increase further in 2007, according to New York-based Moody’s Investors Service.

In its European Corporate Default and Recovery Rate Study, the agency reported no European investment-grade defaults in 2006. But the European weighted speculative-grade default rate rose to 1.9% last year, from 0.8% in 2005.

Andrea Zazzarelli, Moody’s associate director of corporate default research, said: “For some of the most troubled companies, a higher baseline interest rate and a continuation of the decade-long structural decline in some sectors has gone hand-in-hand with the resurgence in defaults during 2006.” Including non-rated issuers, Moody’s found seven bond and four loan defaults on €1.5 billion of debt throughout the year.

In 2007, Moody’s predicts the rate of European speculative-grade defaults will increase in line with a global rise of 1.5% to 3.1%. (See: Moody’s: credit cycle at tipping point) This remains below the historical average for European speculative-grade defaults, which is 4.5%.

Moody’s said 2006 saw ratings upgrades among European issuers fall compared with downgrades, for the first full year since 2003. However, European ratings have proved more stable than their historic average. As elsewhere, recovery rates were also higher than historical levels, and credit losses were marginally lower than those in North America.

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