A new report out of Moody’s is predicting a junk bond default rate as high as 30% in Europe.
“With a deteriorating economic environment, poor corporate results, and restricted access to liquidity for the more vulnerable companies in Western Europe, we believe the acceleration in defaults that occurred in the fourth quarter of 2008 will continue through this year and possibly into 2010. We also believe that debt-financed leveraged buyout transactions (LBOs) will be at the forefront of this increase. As a result, we calculate that between 90 and 112 Western European firms on which we have either a public rating or a credit estimate in the speculative-grade category could in our opinion default in 2009. This would represent a default rate of between 11.7% and 14.7% for our universe of 765 corporate ratings and credit estimates. What’s more, the default rate could remain in the same range in 2010. Our previous estimate, published in December 2008, indicated a range of 8.7% to 11.1%.”
This is in-line with expectations in the U.S. where Moody’s expects defaults to peak in Q4 or Q1 of 2010. As we’ve previously written, default rates have proven to be a relatively accurate predictor of bear market bottoms. This makes sense as the peak in bankruptcy concerns during a recession would coincide with the max fear point a bear market (obviously, stocks going to zero are a good reason to sell). With defaults expected to shoot higher heading into the end of the year I think it’s safe to say that the risks to this rally are abundant.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.