Junk bond
Interview: Moody's Investors Service--- Hamilton, David--- Analyst
>> some news breaking in the professional service from dell computer. dell’s c.e.o. is denying speculation the company will buy sun microsystems. we’ll talk to dell’s president in a moment. microsoft says it will explore every possible way to settle antitrust charges with the european commission. the company lawyer made the comment outside of a three-day hearing in brussels. they say microsoft abused the windows monopoly by trying to dominate the market for software that plays audio and video over the internet. microsoft wrapped up its arguments before the hearing today. regulators for microsoft’s competitors include sun micro and novell. a sign of how much the economy has improved this year. consider these stats from moody’s. in the first three quarters, 66 companies defaulted on their bonds, about half of the 118 defaults a year ago. our next guest says if that trend continues, more companies will be able to sell junk bonds next year. david hamilton from moody’s investors service joins us with his findings.
>> thank you.
>> you did do a study comparing this year and last year. what did you find?
>> we found the pace of improvement we’ve been expecting in the junk bond default rate has exceeded our expectations. we expected the default rate to drift down this year, to be in the neighborhood now of about 7% when it’s actually at 5.7%. so, the numbers have been below expectations and given that they’ve been below expectations for the past few months, that leads us to believe the next 12 months will be even better than we had been forecasting previously.
>> and one would assume this will continue into 2005 as well?
>> well, yeah. i mean, it’s hard to say at this point, but our forecast goes out about a year. we’re expecting a default rate a year from now below 4%, which is below the long-run historical average. if market rates are at least as good as they are now, we can expect it to remain lower than average beyond 2005.
>> what brought this on? better economy? lower interest rates?
>> a combination of i think all those things lower interest rates have certainly immediate the cost of funds better. certain sectoral problems have abated, telecommunications and technology. and i don’t want to oversell the macroeconomic part of the picture, but it has been a plus in the sense that it hasn’t been negative. it’s only really when the economy is contracting that that sort of contributes to the rise of the default rate. what it’s done lately is sort of stay out of the way and that has led to an actual improvement in the fundamental credit quality of these corporate issuers and naturally what’s been driving down the default rate.
>> you say as a conclusion of the study this could be good news for the high-yield market.
>> right. we’ve seen a lot of issuance lately, but the majority of that, the latest figures i’ve seen, about 75% of that volume has been refinancing and that’s good because that means the high-yield market is open, it’s liquid, is pricing risk efficiently. as long as those conditions persist, we should see room for new deals next year.
>> how does what’s happening in the u.s. compare to other pars of the world?
>> that’s interesting because by all accounts the macroeconomic picture in the u.s. is a bit better than in europe, but we’ve seen the european default rate come down quite a bit more sharply than in the u.s. the u.s. has sort of experienced a much more gradual rate of decline. but that has a lot to do with the thickness of the markets. the european corporate bond market is not as well developed in the u.s., not as well diversed and in the u.s. the default rate has bumped along that 5.7% level most of the year. but i think the numbers have converged and they should go down in tandem from now on.
>> what has been the biggest default?
>> mirant. the two big three sectors have been energy, healthcare, and, again, telecommunications. energy and healthcare have been the biggest defaulting sectors by dollar volume. when you look at it by the number of defaults, it’s still telecommunications.
>> in healthcare, what companies?
>> we’re talking about healthsouth, maxim, and magellan, so only three defaults but they total about $7 billion in bonds. a small number of defaults but a big impact.
>> what about in telecom?
>> in telecom, unlike last year and the year before, it’s been more evenly distributed among the companies. not one necessarily stands out. the biggest difference between now and then is the average size of defaults, these telecoms have fallen quite a bit. when you include the gangbuster defaults like worldcom and others of 2002, it’s not surprising of the average size.
>> thanks very much. david hamilton, director of corporate default research at moody’s investors service. some breaking news coming across the bloomberg professional service. new york attorney general eliot spitzer says settlement with putnam measures a starting point. he says the agreement fails to address fundamental issues and that the putnam-s.e.c. settlement is not a template for reform. meanwhile, massachusetts secretary of the commonwealth, william galvin, expects to file additional charges against putnam investments executives over improper short-term mutual fund trading. well, dell posted late-day gains after releasing its third-quarter earnings saying profits surged 21%. when we come back, we’ll speak with dell president and chief operating officer kevin rollins.
