NEW YORK-Corporate bond default rates likely will rise moderately in 1997 after falling in 1996 to their lowest level in 15 years, according to Moody’s Investor’s Service Inc.
Last year, 1.6 percent of speculative grade debt issuers defaulted, less than half the 3.3 percent amount tallied in 1995, said the rating agency’s annual study of United States and international bond defaults. In 1991, corporate bond defaults reached their most recent peak of 10.7 percent of issuers.
In 1996, 27 issuers defaulted on $5.4 billion of long-term, publicly held corporate debt, a sharp decrease from 1995 when 49 issuers defaulted on $8.5 billion. Manufacturers accounted for the largest portion, 27 percent, followed by media companies, 16 percent, and financial and leisure firms, 13 percent each.
Of the 27 issuers that defaulted on publicly issued debt last year, two were companies involved in the telecommunications sector, and both have filed for Chapter 11 bankruptcy protection: MobileMedia Corp., a New Jersey paging carrier that is the second largest in the United States, on $250 million of outstanding debt; and Comptronix Corp., a Delaware manufacturer that makes items including computers and communications equipment under contract for original equipment manufacturers, on $24 million of outstanding debt.
Lea Carty, a Moody’s economist who co-authored the report, attributed the overall drop in bond defaults to a general strengthening of corporate credit quality over the past five years and to a domestic economy that is healthy overall.
This year, however, Carty said he expects the significant supply of lower-rated debt to put upward pressure on speculative grade debt default rates. Some 52 percent of speculative grade issuers are in the higher risk B rating category or below.
That is a larger proportion than existed before the market’s last downturn in 1991, when this figure was 43 percent.
This year, for the first time, Moody’s compared corporate bond defaults for every year since 1920. This cumulative hindsight reveals a strong correlation between default experience and issuers’ credit ratings.
On average, issuers given Moody’s highest investment grade rating of Aaa have a one-year default rate of zero, while the percentage is 4.47 for those rated B, which is a notch below the BB level at the top of the speculative grade category. This inverse relationship is accurate over time horizons of one, five, 10, 15 and 20 years, according to the study.
Moody’s also found that default and loss rates are more volatile for lower rating categories.
“It is important to note that investors in credit risky debt must not only seek compensation for the greater likelihood of default, but also for the great volatility of default and recovery rates,” Carty said.
Moody’s officials said it is impossible for them to extract from their database the number of telecommunications-related issuers, the individual and aggregate amount of their outstanding debt and the ratings on this debt.
