Moody’s Investors Service says global ‘Annual Default Rate’ for speculative-grade financial and non-financial companies will peak at 7.3 per cent in March 2021, and then decline to 4.7 per cent by December 2021.
The credit rating company disclosed this in its ‘Moody’s Credit Transition Model’ data released recently.
It said the trailing 12-month rate was 6.7 per cent at the end of December 2020, up from 3.2 per cent at the end of 2019.
“Despite a decline in the number of defaults over the course of this year, the 2021 default rate will remain above the long-term average of 4.2 per cent since 1983, reflecting the rise in the significant share of low-rated issuers in the corporate universe,” Moody’s said.
Financial Street reports that the annual default rates are ratios of defaulted firms to surviving firms at the beginning of the year.
Moody’s highlighted that despite the severity of the 2020 recession, the current default cycle would peak at a lower rate than the rates associated with the last three recessions.
“We forecast the trailing 12-month global corporate speculative-grade default rate will peak at 7.3 per cent in March. After that, the rate will decline for the rest of the year and finish 2021 at 4.7 per cent. If our default rate forecasts crystalise, the pandemic-induced default cycle will be relatively mild compared with prior recessionary default cycles whose peaks ranged from 9.7 per cent to 13.3 per cent.
“Our forecasts incorporate our assumptions of progress in vaccinations and pandemic management, accommodative monetary policies and an economic recovery in 2021,” said Moody’s.
The company also revealed that most defaults would come from sectors with high exposure to virus-related disruption.
“We forecast a 2.2 per cent default rate in 2021 for the entire (speculative- and investment-grade) rated corporate universe, down from 3.1 per cent in 2020 but above the long-term average of 1.7 per cent. The 2.2 per cent forecast translates into around 137 defaults in 2021.
“By sector, we expect business services and hotel, gaming, and leisure to have the most defaults in 2021, followed by oil and gas. Measured by default rates, hotel, gaming, and leisure will be the most troubled sector,” Moody’s added.