Corporate credit quality experienced considerable improvement in 2004, as bond defaults declined for the third consecutive year, Moody’s Investors Service said Wednesday in its annual survey of global corporate defaults and recovery rates.

The report notes that 34 corporate bond issuers rated by Moody’s defaulted on a total of $16 billion (all dollars are U. S. dollars) in 2004. All but four of the defaulters were based in the U.S. Including five U.S.-based issuers whose ratings were withdrawn before the start of 2004, a total of 39 rated issuers defaulted on $16.6 million of bonds. By comparison, 80 corporate issuers defaulted on $34.2 billion in 2003, and 141 issuers defaulted on $163 billion in 2002.

The global default rate for all rated corporate issuers fell by more than half, to 0.7% in 2004 from 1.7% in 2003. As a percentage of dollar volume, the default rate declined to 0.4% last year from 1.0% in 2003. The lowest tiers of the speculative-grade scale saw the greatest number of defaults. Still, these default rates were considerably below the long-run averages for those rating categories, it notes.

Despite the generally good news, Moody’s sounded a note of caution, due in large part to the growth of the riskiest tiers of speculative-grade debt issuance. “Somewhat worrisome for future credit quality is the fact that nearly 16% of all new speculative grade issuers last year were rated in the Caa-C range,” said David Hamilton, author of the study and Moody’s director of default research. “This is a historic high proportion. While Moody’s currently doesn’t expect the default rate to rise sharply over the next year, the high proportion of Caa-and-below rated issuers will eventually put upward pressure on the aggregate default rate.”

Of the reasons for default in 2004, 16 occurred due to a missed interest payment, 12 due to bankruptcy, and 11 defaults were the result of a distressed restructuring.

For the fifth straight year, the telecommunications sector experienced the highest total default volume: 3 firms defaulted on a total of $6.1 billion. The largest single 2004 default, at $4.7 billion, was by Level 3 Communications, Inc.

In 2004, credit rating upgrades exceeded rating downgrades for the first time since 1997. The downgrade-to-upgrade ratio fell to 0.7:1 in 2004, from 2.4:1 in 2003. Some 14% of outstanding issuers saw upgrades, while 9% received downgrades.