Moody's: Most corporate defaults in advanced markets, but default rates are similar to emerging markets

Although the majority of rated corporate defaults over the past 20 years occurred in advanced economies, reflecting the larger number of rated entities, default rates have remained fairly closely aligned with emerging economies, although they have been driven by different factors, says Moody's Investors Service in a report published today.

The report reviews default data for non-financial corporates, including utilities, in advanced and emerging markets for the 20-year period between 1998 and 2017 and is based on a total of 1,716 defaults.

"Sovereign and banking crises, currency volatility and exchange controls drove many emerging market corporate defaults in the last two decades, while defaults in advanced economies were more likely to result from adverse industry trends, competition and aggressive financial policies," says Richard Morawetz, Moody's Senior Credit Officer for the Corporate Finance Group and author of the report. "Despite facing such significantly different challenges, default rates among companies in the two regions have largely remained aligned."

In absolute terms, the Americas account for the large majority of corporate defaults in advanced economies, due to the much higher number of rated entities in the US, and a high proportion of issuers with low speculative grade ratings. Defaults are somewhat more broadly distributed by continent in emerging markets. Although Brazil, Mexico and Argentina rank among the countries with the most defaults (79 in total), a high number were also recorded in Indonesia (22) and China (19), with somewhat fewer in EMEA countries.

From 1998 to 2017, the average annual corporate default rate for advanced economies was 2.4%, while it was 3.7% for emerging economies. The difference, however, is largely attributable to several years at the beginning of the review period, when sovereign crises in emerging markets led to record default rates in those countries. Even during the financial crisis in 2009, when a record number of defaults occurred, the overall default rates in emerging and advanced economies remained fairly closely aligned.

The collapse of the telecoms sector in 2001-02 and a concurrent slowdown in growth led to a surge in default rates in advanced economies at a time when sovereign crises in emerging economies were pushing up default rates in those countries. The global financial crisis pushed the number of defaults to 254 in 2009, the highest yearly number in both advanced and emerging economies. However, default rates by region were fairly similar.

The slump in commodity prices caused default rates to rise again in 2016 to the highest level since the financial crisis in both advanced and emerging economies, with the energy sector leading the list of defaulters in the more recent period. The energy sector continued to dominate 2017 defaults, though at a much slower pace, while retail grew in significance. Overall, Moody's expects the global speculative grade default rate to fall in 2018 with the stabilisation in commodity prices and economic growth.

In the five years ending 31 December 2017, there were a total of 242 defaults for companies that were rated at the beginning of the period. In both advanced and emerging regions, the ratings at the beginning of the period were strongly predictive of default risk.

Missed interest or principal payments are the primary type of default in both regions. By contrast, bankruptcy filings are more prevalent in advanced economies. The frequency of distressed exchanges increased in 2015-16, although this trend is almost exclusive to advanced economies.

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