The default rate on high-yield debt is creeping upward.
Moody’s Investors Service said Friday that the global high-yield default rate was 2.4% in July, the highest level in 15 months. Plus, this rate is projected to rise slightly through the first half of next year, according to the research group.
Just how big are defaults? The most recent count and cash volume of defaults are “on a disconcerting uptrend, which has kept investors on edge,” says Benjamin Garber, an economist with Moody’s Capital Markets Research, in a report.
The default rate currently is on pace for 77 defaults on $86 billion in debt in 2015, which is well ahead of last year’s count of 53 defaults on $69 billion in debt.
However, the pace of this increase “does not yet mirror previous credit busts,” Garber adds. The historical average of this rate is 4.6%.
To put today’s situation into perspective, he notes that the last two years when the default rate surpassed 5% en route to double-digit percentage peaks, 1999 and 2009, “the annual count of defaults rose by 106% and 158%, respectively,” he states.
In contrast, the estimated jump in the number of defaults this year stands at 45%.
As for the overall default rate, Moody’s projects it “will remain comfortably” under the 25-year average of 4.6% in Q1 and Q2 of 2016.
There was a steady climb in the default rate from 1997 to 2002 and then a rapid climb in 2008 and 2009. In the first period, the rate expanded over 62 months from 1.3% in April 1997 to 11.1% in May 2002.
This development “was marked by rapidly increasing business investment spending growth despite fading profitability and inefficient use of productive capacity,” Garber said.