Default and Recovery Rates of Corporate Bond Issuers: 2000

by David T. Hamilton of Moody's Investors Service,
Greg M. Gupton of Moody's Investors Service, and
Alexandra Berthault of Moody's Investors Service

February 2001

Summary: Corporate bond defaults surged in 2000,and are forecast to continue through 2001. This report documents the 2000 default experience, explores its underlying causes, and discusses Moody's forecast for defaults for 2001. Briefly, Moody's finds that:

• Worldwide, 110 Moody's-rated issuers defaulted on USD33.4 billion of long-term, publicly held corporate and sovereign debt in 2000. Including non-rated defaulters, 167 issuers defaulted on USD49.1 billion.
• The US continues to be the largest single source of defaults, contributing 125 defaults on $29.1 billion of publicly held long-term corporate bonds in 2000.
• Defaults in the telecommunications sector totaled USD6.48 billion, making it the top defaulting industrial sector by dollar volume.  The Construction, Building &Real Estate, and Automobile sectors also experienced a disproportionately high volume of defaults in 2000.
• Moody's issuer-weighted trailing 12-month spec-grade default rate ended 2000 at 5.71% (revised), up from 5.69%.On a dollar-weighted basis, the spec-grade default rate finished 2000 at 6.21%.
• The 2000 all-corporate trailing 12-month default rate finished the year at 2.28%.  Four issuers held investment grade ratings within one year of default, the highest number since 1989.
• Average recovery rates fell again for almost all seniority/security classes in 2000. Overall, recovery rates for corporate bonds averaged 28.8% of par, down from 39.7% last year, and below their post-1970 average of 42%.
• Moody's forecasts the speculative grade default rate to rise to 9.5% by the end of 2001, as negative credit trends persist and as an economic slowdown in the US could now meaningfully affect corporate failures.

JEL Classification: G20, G33.

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