Earlier this week, Moody's Investors Service released a study entitled, "Default and Recovery Rates of Corporate Commercial Paper Issuers, 1972-2009, a report which "documents and updates rating transition, default and recovery rates of corporate commercial paper (CP) issuers for the past 37 years." The NRSRO's press release says, "The commercial paper market experienced a challenging time during the 2007-2009 global financial crisis with concerns over liquidity and rising defaults causing debt outstanding in the corporate CP market to fall from $1,029 billion in August 2008 to $674 billion in December 2009, Moody's Investors Service said in a new report."
Sharon Ou, an Assistant Vice President & Senior Analyst at Moody's, comments, "The credit quality of commercial paper issuers is generally very high and the risk of default remote. However, the recent credit crisis that swept through the global financial markets in 2007-2009 led to the failure of several notable CP programs and resulted in a short-lived panic in the CP market."
The report's Summary comments, "This report updates Moody's previous studies on commercial paper rating performance and the default experience of corporate commercial paper issuers since 1972. Briefly, the study finds that: The commercial paper market experienced a challenging time during the 2007-2009 global financial crisis. Lehman's bankruptcy in 2008 triggered a disruption in the corporate CP market.... Credit quality for corporate CP issuers deteriorated sharply in 2009 as the P-1 downgrade rate climbed to an all-time high of 10.5%, more than doubling the past three-decade average of 4.8%."
The piece also found that, "CP defaults accelerated in 2008-09 with seven issuers failing to honor payments on a total of $4.1 billion of commercial paper. Lehman Brothers, with approximately $3.0 billion of paper, was the largest CP default in history. For the entire period 1972-2009, a total of 59 issuers defaulted on approximately $9.9 billion of rated and unrated CP. While highest number of defaults were registered in the 1989-1990 period, default volume peaked during 2008-2009."
In addition, Moody's adds, "Across regions, the U.S. recorded 20 defaults affecting $6.1 billion of CP. In Europe, another 20 issuers defaulted on a total of $2.3 billion of CP. Of the 59 defaulted issuers, 22 were rated by Moody's at the time of default, with $7.3 billion of CP affected. Of these 22 defaults, 14 issuers were rated Not Prime at the time of default and nine were rated either Not Prime or P-3 at least three months prior to default. Moody's short-term ratings effectively differentiate the default risk. Over a 180-day horizon, P-1 rated issuers historically have a 0.02% probability of default. The frequency of default rises to 0.03%, 0.15% and 0.82% for P-2, P-3 and Not Prime issuers, respectively."
See also our Crane Data News from May 24, "S&P Study Shows Short-Term Defaults Rare, Even After 2008-2009," which says, "Standard & Poor's published 'Default, Transition, and Recovery: Global Short-Term Ratings Performance And Default Analysis (1981-2009),' a study of defaults in the commercial paper and other short-term money markets. Unsurprisingly, it says, 'Consistent with all of our long-term default studies, our short-term corporate ratings performance analysis confirms that higher ratings generally correlate with greater stability and a lower likelihood of default, and vice versa.'"
