Ratings down and defaults up at Moody's

The overall ratings outlook for many major asset classes is now negative, the agency said. Corporate synthetic collateralised debt obligations (CDOs), collateralised loan obligations, transactions backed by loans to small to medium enterprises, and trust preferred CDOs all now face the prospect of further downgrades.

The only derivatives classes to retain stable outlooks are emerging market CDOs and Japanese balance-sheet CDOs for large corporations.

In November 2007, London and New York-based ratings agency Fitch began a review of its ratings methodology, and in April this year arrived at new, more conservative criteria. But Moody’s denied the need for an overhaul of its own ratings system, saying it had “full confidence” in the process. A spokesperson said: “Moody's regularly changes its analytical models and enhances methodologies for a variety of reasons, including to reflect changing credit conditions and outlooks.”

Moody’s also released details of default rates over the past year. Global speculative-grade default rates continued to climb, reaching 2.7% in the 12 months to August - up from 1.4% in the 12 months to August 2007. US default rates showed a similar trend, increasing to 3.3% by the end of August from 1.4%. But European speculative-grade default rates over the past 12 months were only 0.7%, down from 3.0% in the preceding year.

Moody’s projections indicate global default rates will reach 4.9% by the year’s end, with US and European default rates reaching 5.8% and 2.3% respectively - and will continue to rise in 2009.

Kenneth Emery, Moody's director of corporate default research, said: "How high default rates eventually climb will depend in large part on the extent and duration of the developing global economic slowdown."

Default rates among European companies run against both the global and US trends. Emery commented: “Within our rated universe, we’re yet to see an uptick in terms of defaulters.” However, he added: “We do expect upwards pressure on European default rates.” Bank financing is more common in Europe, added Emery, which further skews the statistics, as results published by Moody’s apply only to rated issuers.

See also: Fitch nears end of global CDO review

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• Topics
• Risk management
• Regulation
• Structured products
• Credit derivatives