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Upturn in the default rate cycle, says Moody's

The global speculative-grade default rate edged up to 2.5% in February from 2.3% in January, possibly signalling a turning point in the direction of the default rate, according to a report issued by Moody's Investors Service.

"For several months now, Moody's has been predicting that default rates would reach a cyclical low near the second quarter of this year," said David Hamilton, Moody's director of default research. "February's rise may indicate that we are near the turning point. Our default forecasting model indicates that the default rate will gradually increase over the first half of this year, break higher in the last six months, and reach a 3.2% level by the end of February 2006."

Despite the expected increase, Hamilton cautioned that the level of the default rate is likely to remain below its 4.9% historical annual average.

"Even in a high-default scenario, with default counts running 50% higher than we are currently forecasting, the default rate still would not quite reach the 4.9% historical average," he said.

Last month, five corporate issuers defaulted on a total of $1.2 billion of bonds. The month's largest default ($453 million) was R.J. Tower Corporation's filing for reorganization under Chapter 11 of the US Bankruptcy Code.

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