Worldwide bond default rates hit a five-year high in 1998.

The dollar volume of defaulted debt in the world's corporate and sovereign bond markets soared to a record $29.3 billion in 1998, as default rates hit a five-year high of 3.31 percent for speculative-grade issuers. In Moody's Investors Service's annual corporate bond report, the debt-rating

agency and financial publisher noted that bond defaults by three sovereigns last year represented three of only 10 such defaults since WWII. Pakistan defaulted on $300 million of Eurobonds, the Russian Federation on $9.7 billion and Venezuela on $270 million. Pakistan and Venezuela delayed interest payments, but made up all payments within the allotted grace period.

Among key factors helping to push defaults higher, Moody's cited disruption in the emerging markets, record issuance of high-yield bonds and a general deterioration of credit quality. Moody's reports that "1998 saw the first three consecutive quarters since 1993 in which rating downgrades outnumbered upgrades."

Looking ahead, Moody's says wide yield spreads in the emerging markets could mean strong refinancing risk - thus higher default risk - for issuers in those sectors. Overall, however, Moody's outlook for 1999 is relatively positive.

"Our outlook," says Sean C. Keenan, a vice president in Moody's Risk Management Unit, "is for continued strong global issuance with a moderation in default activity and a gradual narrowing of yield spreads."

U.S.-based Issuers Lead Default Totals

In the corporate sector, Moody's reports that U.S.-based issuers were the primary source of last year's bond defaults, with 50 issuers defaulting on a total of $8.8 billion. Indonesian issuers (some based in the Netherlands) were second, with 34 issuers defaulting on $5.2 billion. Seven other Asian countries contributed 21 additional defaults for a total of $3.6 billion. The remaining 22 issuers were located in nine different countries in Europe, Latin America, the Caribbean and Canada.

Keenan also notes that non-bank financial institutions contributed the largest share of last year's default total in the corporate sector - 35 percent by dollar amount. Industrial issuers and retail establishments were second and third in 1998, at 25 percent and 16 percent of the dollar volume, respectively.

Default Rates Expected to Moderate in 1999

Moody's reports that 127 issuers defaulted on bonds in 1998, roughly double the 65 defaulting issuers in 1997. Meanwhile, the $29.3 billion of defaulted debt last year (which includes the Russian Federation default on $9.7 billion) is more than double 1997's $9.1 billion and well above the market's earlier record of $22.3 billion set in 1991.

At 3.31 percent, last year's speculative-grade issuer default rate was up sharply from it's 1997 pace of 2.02 percent, the highest rate since 1993's 3.51 percent. The default rate for all corporate issuers also nearly doubled from 0.68 percent in 1997 to 1.27 percent in 1998.

Universe of Rated Bond Issuers Expanded 11 Percent in 1998

Moody's further reports that 1998's surge in default activity was accompanied by a surge in new debt issuance that, despite a sharp deceleration in September and October, exceeded $273 billion - an increase of more than 7 percent over last year's record total. The markets saw an even larger increase in the number of issuers with debt outstanding, as the Moody's-rated universe of long-term public, corporate and sovereign debt issuers increased by 11 percent over the course of 1998.

Much of that growth, says Keenan, came from European Community countries, where anticipation of monetary union and a bullish environment for bonds helped to increase the number of rated bond issuers by 15 percent over the year. Keenan explains that the rapid expansion of the bond base over the past three years has "provided a strong counterbalance to the increase in defaults, helping to contain default rates to within their recent historical range." Even at 3.31 percent last year, the speculative-grade trailing 12-month default rate still remains below the post-1970 average of 3.37 percent.

For further information, visit Moody's Web site at www.moodys.com.