Corporate Default Outlook

1
Corporate Default Outlook

• Presented by
• David T. Hamilton,
• Credit Policy Group

Presented to the Capital Markets Credit Analysts
Society April 26, 2006
2
Whither default rates?

• Default rates currently sending mixed signals
  about trends in credit risk
• Issuer-based default rates show decade-low
  default rates 1.7 as of March 2006, well below
  5.1 historical average
• Dollar volume-based default rates have increased
  sharply to 4.2 as of March 2006, approaching its
  5.2 historical average
• Defaults in the past 12 months primarily arising
  from troubled industry sectors in the U.S.
• Non-U.S. default rate 0 as of March 2006
• Independent power, cable, transportation and
  autos sectors comprised 86 of total volume of
  defaults in 2005

3
2006 spec-grade default rate forecast

• Model 3.0
• High 4.5
• Low 1.6

Historical Average
4
Moodys default rate forecasting model

• Statistical model based on three broad factors
• Changes in distribution of credit ratings
• Percent rated speculative-grade
• Percent of speculative-grade rated below Ba
• New issuance/seasoning effect
• New speculative-grade issuers are most likely to
  default in third year after issuance
• Macroeconomic trends
• Growth rate of industrial production (negatively
  related)
• Nominal 10-year yield (positively related)
• Slope of Treasury yield curve (positively related)

5
2006 default recovery rate outlook