Friday, January 16, 2009

Corporate defaults to surge, warns Moody's

By Bloomberg and Reuters, 15/01/2009, London

Defaults by corporate borrowers worldwide might rise to 15.1 percent in the next 12 months as the economy turned "perilous", Moody's Investors Service said yesterday, boosting its earlier forecast by almost 50 percent.

About 300 companies will fail to meet their obligations this year, equivalent to 25 a month, Moody's says in a report.

The speculative-grade default rate was 4 percent at the end of last year.

Last month Moody's predicted a default rate of 10.4 percent for the end of this year.

"Global economic conditions are now substantially weaker and more perilous than they were in the two previous credit cycles of 1990/91 and 2001/02," Kenneth Emery, Moody's director of corporate default research, says in the note.

About $1 trillion (R10.2 trillion at yesterday's exchange rate) of credit losses and write-downs at financial institutions worldwide have combined with the deepest economic slowdown since World War 2 to weaken companies' finances and slash the cash flow they can use to pay their debts.

Nortel Networks, North America's biggest maker of telephone equipment, filed for bankruptcy protection in the US yesterday.

Defaults in the US would rise to 15.3 percent at the end of the year, Moody's said. The rate in Europe would increase to as much as 18.3 percent.

The soaring default rate predicted by Moody's model was driven by "unprecedented" corporate bond yields relative to government debt, the lowest ratings mix in history, and expectations that the US unemployment rate would increase to 9 percent by year-end from the current 7.2 percent, said the ratings company.

"Because the model drivers are outside recent historical experience and future economic conditions remain highly uncertain, the default forecast is subject to some margin of error ," Emery says in the note.

The speculative-grade distress index that Moody's started in 2006 rose to a record 53.1 percent at the end of last year.

The index began to increase at the end of 2007 and "spiked sharply" in the final three months of 2008, Moody's said.

There were 104 Moody's-rated corporate defaults last year, of which 22 took place in December. Of the companies that defaulted last year, 86 were from the US and Canada, and 12 from Europe, Moody's said.

In 2007 18 companies defaulted: 15 from North America and three from Europe.

Meanwhile, data show that US consumers cut their spending even more sharply than expected last month, while Germany's export-driven economy is forecast to shrink this year at its fastest pace in more than six decades.

Sales at US retailers fell a steeper-than-expected 2.7 percent last month after a revised 2.1 percent drop in November. The latest US data show that relentless job cuts last year - the worst since 1945 - forced consumers to cut back on spending during the holiday period. "Bad, ugly and worse," said Marc Pado at Cantor Fitzgerald, commenting on the retail figures.

Economists said the German economy - which has never shrunk by more than 1 percent in a year since World War 2 - could shrivel by 3 percent or more this year.

"Germany is facing the most difficult economic times in decades," said Chancellor Angela Merkel.