Moody’s predicts rise in commercial loan defaults

by Gill Montia

Story link: Moody’s predicts rise in commercial loan defaults

Moody’s Investors Service is forecasting a sharp rise in the number of businesses world-wide that will be defaulting on their repayment obligations in 12 months’ time.

The credit rating agency is predicting that the global default rate will increase fourfold over the coming year (from 1.2% to 4.2%) as a result of the credit squeeze and lower economic growth. The 4.2% figure compares with a forecast of 3.6% in November.

Should the US enter a period of sustained recession, Moody’s estimates that default rates could increase to almost 10%.

Global business default rates are currently at a 26-year low and Kenneth Emery, director of corporate default research at Moody’s in New York, explains: “Currently low default rates reflect the easy credit conditions of the past couple of years, which allowed most issuers to refinance on favourable terms.”

However, Moody’s is expecting the global default rate to reach 4.7% by November 2009 and is forecasting that the current 1% default rate of US companies will also increase to 4.7% in the next two years.

Turning to Europe, Moody’s is predicting that in the coming year, around 3% of companies will not have sufficient funds to meet interest repayments.

However, Andrea Zazzarelli, associate director of corporate default research at the agency’s London office, believes that European companies “should generally have enough room for manoeuvre to absorb the near-term challenges”.