Corporate default rate expected to fall

The week before last, Standard & Poor's released its latest global data on corporate defaults for 2009. The total came to 265 corporate defaults, and the highest annual tally since S&P started keeping count in 1981. This compares with the previous record of 229 defaults recorded in 2001.

In isolation these numbers mean very little. If S&P continues to expand its business and assign more corporate credit ratings over time, then it can be reasonably expected that the number of defaults in each economic downturn will continue to increase.

A more interesting observation that can be made from the data provided is that only three defaults were by companies that carried investment grade ratings immediately prior to default. This is marginally higher than the outcome that is suggested by a historical one-year survival rate of 99 per cent for investment grade companies.

This is not a surprising result given the severity of the financial crisis and in fact, it appears to be a very good result.

The default rate for the remainder of the group (all speculative grade) companies was 9.77 per cent globally, with the US recording the highest default rate at 10.9 per cent. S&P says it expects the default rate to fall to 6.9 per cent for 2010, with a pessimistic and optimistic scenario range of 9.9 per cent to 5.5 per cent.

Last week, Moody's Investor Service reported that it recorded 266 corporate defaults globally for 2009 and a speculative grade default rate of 12.5 per cent. The rate for the US was 13.2 per cent.

Moody's went on to forecast a speculative grade default rate of just 3.3 per cent for 2010, based on the rapid decline in the pace of defaults observed in the last few months and expectations that it will continue for at least the first half of this year.