Last year saw the fewest defaults and the least amount of defaulted debt among Canadian corporate bond issuers since 1997, Moody’s Investors Service reported in its fourth annual review of corporate defaults, recovery rates, and credit losses among Canadian corporate bond issuers.

During the year, just two unrated Canadian bond issuers defaulted on $86 million, down from $400 million by one Moody’s-rated and one unrated issuer in 2004.

“Last year turned out to be strong for corporate credit quality among Canadian bond issuers,” says Sharon Ou, an analyst with Moody’s Investors Service. “In addition to slow default activity, credit quality trends were also more favourable for Canadian corporate issuers in 2005 than they were in 2004, with the ratio of rating upgrades to downgrades in the year at 0.95 compared with 0.26 in 2004.”

The dearth of defaults among Moody’s rated Canadian issuers lowered the default rate for rated Canadian issuers to zero for 2005, down from 0.6% in 2004. The default rate for speculative-grade rated Canadian issuers was also zero, down from 1.8% in 2004.

Looking ahead, however, Moody’s expects the corporate default rate in Canada to pick up in tandem with the global default rate, the latter of which is anticipated to rise from its current level of 1.7% to 3.0% by the end of March 2007.

“Although Moody’s does not forecast Canadian default rates separately, we expect that many of the factors driving our prediction of higher global default rates — including rising interest rates and lower average credit quality among speculative-grade issuers — will also impact the Canadian default rate over 2006-2007,” adds Ou.

Although 2005 saw generally healthy aggregate credit conditions, there was a notable rise in the number of issuers whose ratings were lowered from investment grade to speculative grade. Five out of 128 Canadian issuers lost their investment-grade ratings and joined the ranks of the other 62 speculative-grade issuers. The increase in fallen angels was primarily attributable to downgrades of the Canadian-based subsidiaries of U.S. auto manufacturers.

Among 2005’s fallen angels were two affiliates of General Motors Corp.: General Motors Acceptance Corp. of Canada Ltd. and General Motors Nova Scotia Finance Co. Ford Credit Canada Ltd., the Canadian unit of Ford Motor Co., became a fallen angel in January 2006.

Between 1989 and 2005, 67 Canadian bond issuers defaulted on a total of C$32.6 billion in bonds. Thirty-four of the 67 have been rated by Moody’s, with affected debt totaling C$28.3 billion. No Canadian corporate bond issuer rated single A or above has ever defaulted within a year of holding those ratings.

Moody’s updated study shows that corporate default rates by rating category in Canada are similar to those in the U.S. over the same time period. The average one-year speculative-grade default rate between 1989 and 2005 for Canadian corporate bond issuers is 5.0% compared to 5.5% for U.S.-domiciled issuers.

The similar default experience of Canadian-domiciled bond issuers and those in the U.S. highlights the growth and development of the Canadian economy.

“Once largely dominated by investment-grade issuers in the financial and energy sectors, the Canadian corporate bond market has diversified and matured quickly, particularly the speculative grade-rated segment of this market. Today, speculative-grade issuers constitute about one-third of the Canadian corporate bond market, roughly the same as in the U.S.,” says Andrew J. Kriegler, managing director of Moody’s Canada.