Global credit quality continues to improve, says Moody’s Investors Service.

The rating agency says in a new report that the global speculative-grade default rate slipped to 3.3% in June, down from 3.4% in May and 4.2% at the end of the first quarter 2004. This marks the ninth consecutive quarterly decline in the global speculative-grade default rate since its January 2002 peak. Moody’s default rate forecasting model indicates that credit quality is expected to improve into the second quarter 2005.

“We are firmly in the expansionary phase of the credit cycle,” said David Hamilton, Moody’s director of default research. “The balance sheet repair, debt refinancing, and improving profitability of corporate issuers has resulted in steadily improving fundamental credit quality over the past two years, leading the default rate lower.”

Default frequency and default volume both registered big drops in the first half of 2004 compared with the first half of last year: last year, 46 issuers defaulted on US$20 billion of bonds from January through June. In the first half of 2004, a total of 20 corporate issuers have defaulted on approximately US$6 billion of bonds.

In June, four Moody’s-rated corporate issuers, all U.S.-based, defaulted on a total of US$1.2 billion of bonds, bringing the second quarter 2004’s default count and dollar volume to nine corporate issuers and US$1.9 billion of debt. The first quarter saw 11 issuers default on more than US$4.1 billion. As a percentage of dollar volume, the global speculative-grade default rate fell to 3% in June from 3.2% in May and 4.3% at the end of the first quarter.

Moody’s predicts that the global speculative-grade default rate will fall to 2.8% at the end of 2004, edging up to 2.9% by the end of June 2005. The latest forecast results suggest that the global speculative-grade default rate may reach a cyclical low near 2.7% in the spring of 2005.

“The default rate last reached a cyclical low of 1.4% in April 1997, when the economy and bond issuance were booming,” Hamilton said. “Based on current readings of the factors that help forecast the default rate – such as rating changes, industrial production, and the slope of the yield curve – a cyclical low the neighborhood of 2.7% may be the best we can expect for some time.”