Moody's cuts default forecast, even as defaults up

LONDON, April 7 (Reuters) - Moody's Investors Service cut its monthly forecast of the peak high-yield global default rate to 14.6 percent from as high as 16.4 percent two months ago, even while actual defaults rose in the first quarter.

As the economic downturn worsened, the speculative-grade default rate rose to 7 percent for the 12 months to end-March from 4.1 percent for the period to end-2008, the ratings agency said in a statement on Tuesday.

Meanwhile, the Moody's forecasts for peak default rates dropped off as the average high-yield bond spread narrowed from more than 2,000 basis points in the fourth quarter to less than 1,600 basis points, said Kenneth Emery, the agency's director of default research.

"This is a good sign if these lower spreads can be maintained and if they can continue to come down," he said.

High-yield bond spreads, unemployment rates and the ratings mix of the universe of companies are all inputs that go into the Moody's default forecast model, Emery said.

The biggest factor behind the recent narrowing of high-yield spreads has been government intervention to support banks and supply liquidity to the markets, he said, even though relatively little of that liquidity has trickled down to high-yield companies so far.

On an historical basis, high-yield spreads are still very high, Emery said, adding that, by comparison, levels reached around 1,000 basis points in the 2001-2002 and 1990-1991 downturns, which translated into default rates of around 10 percent.

Moody's forecasts a higher peak default rate for Europe than for the United States due to its mix of ratings and its smaller number of rated corporate borrowers, he said.

The ratings agency now expects Europe's rate to peak at 21.2 percent in the fourth quarter versus last month's prediction of 22.5 percent. Its U.S. peak forecast has declined to 14.1 percent in the fourth quarter from as high as 16.4 percent two months ago.

The forecasts compare with an all-time high for U.S. junk bond default rates at 15.9 percent in June 1933, according to Moody's data.

A total of 79 Moody's-rated companies have defaulted so far in 2009, including 35 in March. That compares with 16 companies in the first quarter of 2008.

The actual U.S. high-yield default rate ended the first quarter at 7.4 percent, up from 4.5 percent in the fourth quarter.

The European high-yield default rate more than doubled to 4.8 percent from 2.0 percent.

(Reporting by Jane Baird)