MARCH 4, 2015 CREDIT POLICY
SPECIAL COMMENT Annual Default Study: Corporate Default and
Recovery Rates, 1920-2014
Table of Contents: SUMMARY RATING RATIONALE 1 INTRODUCTION 2 DEFAULTS REMAINED BENIGN IN 2014 3 MOST DEFAULTS CAME FROM CAPITAL INDUSTRIES BUT ENERGY IS THE BIGGEST CONTRIBUTOR BY VOLUME 4 SPECULATIVE-GRADE DEFAULT RATE DECLINED TO 2.0% 5 RATING DRIFT TRENDED UP DURING Q1-Q3 BEFORE DIPPING IN Q4 5 2014’S RECOVERY RATES BROADLY HIGHER THAN THEIR HISTORICAL AVERAGES 6 DEFAULT RATE EXPECTED TO RISE MODESTLY IN 2015 8 RATING ACCURACY METRICS 11 MOODY’S RELATED RESEARCH 13 METHODOLOGY AND DATA SOURCES 14 GUIDE TO DATA TABLES AND CHARTS 14 Summary Rating Rationale
This report comprises Moody's 28th annual default study in which we update statistics on the
default, loss, and rating transition experience of corporate bond and loan issuers for 2014, as well as for the historical period since 1920. This study covers financial institutions, non-financial corporates, and utilities which have long-term debt ratings. Briefly, we find that:
? Fifty-three Moody’s-rated corporate issuers defaulted in 2014, down from 69 in 2013. In contrast, default volume was up in 2014 consisting of $41.4 billion in bonds and $27.5 billion in loans. In comparison, there were $37.6 billion of bonds and $17.9 billion of loans which defaulted in 2013.
Defaults were recorded in a number of industries led by the Capital Industries, which registered 20 (or 38% of) defaults. Across regions, 31 of the defaulted issuers were from North America. The remaining defaults were from Europe, Latin America, Asia, and Africa. Measured by default volume, North America had the largest volume with $52.8 billion in defaulted bonds and loans.
Moody’s global speculative-grade default rate ended 2014 at 2.0%, down from 2013’s year-end level of 3.0% and corresponding closely to our year-ago forecast of 2.3%. The default rate for all Moody’s-rated corporate issuers closed at 1.0% at the end of 2014, also lower than the 1.4% level at year-end 2013, and again close to our year-ago forecast of 1.1%. Measured on a dollar volume basis, Moody’s global speculative-grade bond default rate finished 2014 at 1.8%, up from 1.2% at the end of 2013. Among all Moody’s-rated issuers, the volume-weighted default rate edged up to 0.4% in 2014 from 0.3% in 2013. Moody’s global speculative-grade default rate forecasting model now predicts that the speculative-grade default rate will rise in 2015 and finish the year at 2.7%. The forecast, if realized, will be higher than 2014’s closing level of 2.0% but well below the long-term average of 4.5% since 1983.
? ? Analyst Contacts: NEW YORK +1.212.553.1653 ? ? Sharon Ou +1.212.553.4403 Vice President - Senior Analyst sharon.ou@moodys.com John Kennedy +1.212.553.1303 Associate Analyst john.kennedy@moodys.com Zhi Zeng Associate Analyst zhi.zeng@moodys.com +1.212.553.1754
Albert Metz +1.212.553.4867 Managing Director - Credit Policy Research albert.metz@moodys.com
THIS REPORT WAS REPUBLISHED ON 20 MARCH 2015 WITH MINOR CHANGES IN DEFAULT RATES FOR GOVERNMENT RELATED ISSUERS AND THOSE GROUPS WHICH INCLUDE SUCH ISSUERS.
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Following the recovery of the US and European economy, credit quality improved in 2014 with the number of upgrades slightly outpacing downgrades for the first time since the global financial crisis. However, it should be noted that about one fifth of 2014’s upgrades were from the US utility sector driven by Moody’s updated view on the reliability and credit supportiveness of US utility regulations. Excluding those utility upgrades, downgrades would have again outpaced upgrades in 2014, but there were still more upgrades and fewer downgrades in 2014 than in 2013.
Measured by post-default trading prices, the average recovery rate for senior unsecured bonds was 43.3% in 2014, close to 2013’s 43.8%.
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Introduction
For the fifth consecutive year, corporate credit conditions have been quite benign. Despite a weak global economic recovery and significant geopolitical risks, healthy corporate fundamentals and a fertile primary market have helped to maintain a low corporate default rate in 2014. Indeed, many lower rated issuers were able to access the debt market with issuer-friendly terms and refinance their debt with longer-term maturities. Issuance of leveraged loans and high yield bonds remained strong in 2014.
Although defaults were relatively few last year, 2014 was not without issues. While high yield spreads steadily declined in the first six months, they trended higher in the second half, accompanied by increased volatility. Spreads widened for a number of reasons. First came the worry of Fed’s QE withdrawal in July. This was followed by geopolitical concerns stemming from the escalation of the Russia-Ukraine conflict and an ongoing slowdown in China’s economy, with particularly weak data last summer. Finally, the sharp decline in oil prices cooled down investor sentiment for risky assets.
Another notable characteristic of 2014 was the divergence in economic growth across regions. On the positive side, the US economy continued to improve, albeit weakly, with its GDP increasing by 2.4% in 20141 and the unemployment rate declining from 6.8% to 5.6%.2 The economic recovery in Europe was at an even slower pace last year, dampened by country-specific structural challenges, ongoing muted global output and trade growth, and geopolitical tensions. More recently, the risk of a Greek exit from the euro has returned. Moreover, the impact of the unfolding deep recession in Russia on Europe is as yet uncertain. In Asia, China’s GDP growth slowed while Japan’s economy contracted in the second and third quarter. Though Japan’s growth was positive in the fourth quarter, markets remain concerned about the fragility of its recovery.
Lackluster global growth has translated into expectations of further weakness in demand for oil in an already oversupplied market. Oil prices fell by nearly 50 percent in the second half of the year with West Texas Intermediate ending 2014 at a five-year low of $53 per barrel. Looking ahead, many investors wonder whether the slow economic growth and political volatility signal an end of the current benign credit cycle. With this question in mind, we’ve updated Moody’s 28th Annual Default Study by documenting the default and recovery experience of corporate debt issuers for 2014 as well as for the historical period since 1920.3 We also discuss Moody's default rate forecast for 2015 and review the performance of Moody's ratings.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.
1
See BEA's news release on Jan 30th 2015. 2
Per United States Department of Labor.
3
The analysis of default and rating transitions in this report is limited to Moody’s-rated financial and non-financial corporate issuers, including utility companies. Consistent with prior year studies, this report’s default and transition rate statistics only cover issuers that have Moody’s-rated bonds and/or loans and default refers to debt default. Unless otherwise specified, ratings in this report are issuer level, senior unsecured equivalent ratings which are derived from Moody’s Senior Rating Algorithm.
2 MARCH 4, 2015
SPECIAL COMMENT: ANNUAL DEFAULT STUDY: CORPORATE DEFAULT AND RECOVERY RATES, 1920-2014
CREDIT POLICY
Defaults remained benign in 2014
Majority of defaults took place in Q2 and Q3
A low interest rate environment and accommodative monetary policies continued to provide sufficient liquidity to the market, allowing high yield borrowers to access debt markets at favorable terms.
Worldwide, only 53 Moody’s-rated corporate issuers defaulted in 2014, down from 69 in 2013 and slightly below our one-year ago forecast of 61 defaults. Most of the 2014 defaults were recorded in the second and third quarters when 38 companies defaulted, accounting for 72% of defaults for the whole year. In 2014, a total of $68.9 billion of debt went into default, which comprised $41.4 billion of bonds and $27.5 billion of loans. In comparison, the default volume was lower at $55.5 billion in 2013, consisting of $37.6 billion of bonds and $17.9 billion of loans. The largest default in 2014 was Energy Future Holdings Corp (EFH,
formerly TXU) which filed for bankruptcy with several of its subsidiaries in April.4 With approximately $40 billion of debt at default, EFH was the second largest defaulter in history among Moody’s-rated non-financial corporations.5
From a geographic standpoint, 31 (or 58% of) defaulted issuers were from North America in 2014. Europe accounted for another 11 defaults and the remainder came from Latin America (five), Asia Pacific (five), and Africa (one). Compared to 2013, default counts decreased in North America , Europe and Latin America but increased in Asia Pacific and Africa. The most notable change was in Europe, where defaults fell more than 50% from 24 in 2013 to 11 in 2014. In terms of volume, defaulted debt totaled $68.9 billion in 2014, up from $55.5 billion a year prior. Of that, $52.8 billion was from North America, though as noted above $40 billion is attributable to just one corporate family (EFH); default volume was $7.9 billion in Europe. Outside of the corporate debt market (and hence outside the scope of this report), 2014 also recorded a sovereign default by the Argentine government as it failed to honor the coupon payments on Argentine foreign legislation bonds which were restructured in 2005 and 2010.
In terms of default types, last year’s defaults were generally evenly distributed among distressed exchanges (36%), bankruptcies (34%), and payment defaults (30%). Exhibit 1 presents the annual default counts and defaulted debt volumes for the period 1970-2014.
EXHIBIT 1 Defaults remained benign in 2014 Default Volume ($ Bil)350.0 300.0 250.0 200.0 150.0 100.0 50.0 -Default Count197019711972197319741975197619771978197919801981198219831984198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014Source: Moody’s Investors Service 45
Oncor Electric Delivery Company LLC, which is 80% owned by EFH, was not part of the filing.
The largest defaulter remains General Motors, which had roughly $50 billion of debt when it filed for bankruptcy in June 2009.
3 MARCH 4, 2015
SPECIAL COMMENT: ANNUAL DEFAULT STUDY: CORPORATE DEFAULT AND RECOVERY RATES, 1920-2014
CREDIT POLICY
Most defaults came from Capital industries but Energy is the biggest contributor by volume
Of the 53 defaults last year, 38% were by issuers in the Capital Industries sector.6 This was followed by issuers in the Technology sector, which contributed 17% of defaults in 2014. When measured by default volume, however, the Energy & Environment sector topped the list by accounting for more than half of the total defaulted volume. The next highest share of default volume came from the Capital Industries sector, which contributed 20% of defaulted debt. Exhibit 2 shows the distribution of 2014 defaults by broad industries.
EXHIBIT 2 2014 Default counts and volumes by broad industry Panel A Distribution of defaulted issuer counts Media & Publishing4%Energy & EnvironmentPanel B Distribution of default dollar volume Banking6êpital Industries20%Consumer Industries2%Non-Bank Finance4%Consumer Industries6%Retail & Distribution7%Technology17%Transporta-tion2onking11%Transporta-tion0%Technology9%Retail & Distribution3êpital Industries38%Non-Bank Finance1%Media & Publishing1%Energy & Environment58%Source: Moody’s Investors Service Although the Capital Industries sector accounted for 38% of defaults last year, it was not the sector with the highest rate of default. That distinction belongs to the Technology industry, which had a 2.0% default rate in 2014 (see Exhibit 3).
EXHIBIT 3
Default rate highest in the Technology Sector
Broad Industry
Default Rates*
Banking Capital Industries Consumer Industries Energy & Environment Non-Bank Finance Media & Publishing Retail & Distribution Government Related Issuers Technology Transportation Utilities
*Issuer-Weighted
0.8% 1.7% 0.5% 1.3% 0.4% 1.1% 1.8% 0.0% 2.0% 0.7% 0.0%
6
The Capital Industries sector includes automotive, capital equipment, chemicals, plastics, & rubber, construction & building, containers, packaging, & glass, forest products & paper, metals & mining, and business service industries.
4 MARCH 4, 2015
SPECIAL COMMENT: ANNUAL DEFAULT STUDY: CORPORATE DEFAULT AND RECOVERY RATES, 1920-2014
CREDIT POLICY
Speculative-grade default rate declined to 2.0%
As there were fewer defaults in 2014 than in 2013, the trailing twelve-month issuer-weighted default rate for all Moody’s-rated issuers closed at 1.0% in 2014, down from 1.4% in 2013. Among speculative-grade issuers, the default rate also fell to 2.0% from 3.0% (see Exhibit 4). The recent default rate has remained low relative to the historical average of 4.5% since 1983. Measured on a dollar volume basis, Moody’s speculative-grade corporate bond default rate rose to 1.8% in 2014 from 1.2% in 2013. The increase in the dollar-weighted bond default rate mainly stemmed from a few sizable defaults including Energy Future and Momentive Performance Materials.7 For all of Moody’s-rated issuers, the volume-weighted default rate edged higher to 0.4% in 2014 from 0.3% in 2013.
EXHIBIT 4 18%8%6%4%2%020192519301935194019451950195519601965197019751980198519901995200020052010Global speculative-grade default rate declined in 2014 Source: Moody’s Investors Service Rating drift trended up during Q1-Q3 before dipping in Q4
Credit quality among Moody’s-rated issuers improved in 2014 with the number of rating upgrades slightly outpacing downgrades for the first time since the global financial crisis. However, it should be noted that approximately one fifth of 2014’s rating upgrades were from the US Utility sector in January, which resulted from Moody’s updating its view on the reliability and credit supportiveness of US utility regulations.8 Excluding those utility upgrades, rating downgrades would have again outpaced upgrades in 2014, but it would still be true that there were more upgrades and fewer downgrades in 2014 than in 2013.
Among the four quarters in 2014, credit quality, as measured by rating changes, showed an upward trend in the first three quarters9 as indicated by the issuer-weighted quarterly rating drift (the percentage of
upgrades minus that of downgrades).10 In the fourth quarter however, rating drift turned negative reflecting geopolitical and economic concerns (see Exhibit 5).
7
Momentive Performance Materials had over $3 billion of debt when it filed for bankruptcy in April. 8
See Moody’s Special Comment US utility sector upgrades driven by stable and transparent regulatory frameworks, Feb 2014. 9
Not counting those US Utility upgrades in January. First quarter’s rating drift was 1.6% if we include those Utility upgrades. 10
Issuer-weighted measures which reflect the direction rather than magnitude of rating changes.
5 MARCH 4, 2015
SPECIAL COMMENT: ANNUAL DEFAULT STUDY: CORPORATE DEFAULT AND RECOVERY RATES, 1920-2014