SPECIAL COMMENT Corporate Default and …

1 SPECIAL COMMENT GLOBAL Corporate FINANCE FEBRUARY 28, 2011 Table of Contents: SUMMARY 1 INTRODUCTION 2 DEFAULTS SLOWED DOWN CONSIDERABLY IN 2010 2 Default RATE OUTLOOK FOR 2011 7 RATING ACCURACY METRICS 9 MOODY S RELATED RESEARCH 12 DATA TABLES AND CHARTS 13 GUIDE TO DATA TABLES AND CHARTS 60 METHODOLOGY AND DATA SOURCES 61 Analyst Contacts: NEW YORK Sharon Ou Assistant Vice President - Analyst David Chiu Associate Analyst Albert Metz Managing Director - Credit Policy Research Corporate Default and recovery Rates, 1920-2010 Summary This report comprises Moody's twenty-fourth annual Default study in which we update statistics on the Default , loss, and rating transition experience of Corporate bond and loan issuers for 2010, as well as for the historical period since 1920.

2 This study covers financial institutions, non-financial corporates, and regulated utilities which have long-term debt ratings. Briefly, we find that: 57 Moody s-rated Corporate issuers defaulted on a total of $ billion of bonds and $ billion of loans in 2010. Including issuers whose ratings were withdrawn prior to January 1, 2010 or newly rated in 2010, 61 Corporate issuers defaulted on $ billion of bonds and $ billion of loans. 2010 s defaults were found in a variety of industries led by the Capital Industries and the Consumer Industries sectors, which saw thirteen and ten defaults, respectively.

3 Across regions, defaults remained concentrated in North America with 45 issuers defaulting on $ billion of debt. In comparison, eight Moody s-rated Corporate issuers defaulted on $ billion of debt in Europe. The remaining defaulters were Latin-American and Asian issuers. Moody s global speculative-grade Default rate ended 2010 at , noticeably down from 2009 s year-end level of The Default rate for all Moody s-rated Corporate issuers fell to at the end of 2010 from at year-end 2009.

4 Both results correspond quite closely with our one-year-ago forecasts of and , respectively. Measured on a dollar volume basis, Moody s global speculative-grade bond Default rate ended 2010 at , down from at the end of 2009. Among all Moody s-rated issuers, the volume-weighted Default rate dropped from in 2009 to in 2010. Moody s global speculative-grade Default rate forecasting model now predicts that the speculative-grade Default rate will decline gradually to by the fourth quarter of 2011, a level significantly below the long term average of 5% since 1983.

5 The quarterly downgrade-to-upgrade ratio declined to in the second quarter of 2010, the lowest quarterly level in the past three years. The ratio finished the fourth quarter at Measured by post- Default trading prices, the average recovery rate for senior unsecured bonds rose to in 2010 from in 2009. GLOBAL Corporate FINANCE 2 FEBRUARY 28, 2011 SPECIAL COMMENT : Corporate Default AND recovery RATES, 1920-2010 Introduction Moody s credit ratings facilitate the efficient functioning of capital markets by providing independent opinions on the creditworthiness of debt obligations issued by Corporate issuers around the world.

6 One of the primary purposes of Moody s Corporate Default study is to communicate the historical performance of Moody s ratings as predictors of Default and loss severity for Corporate issuers. In addition to providing useful data for investors and regulators, Moody s Default studies also contribute to the transparency of the rating process and directly address the meaning of Moody s long-term debt ratings scale. In this study, we first summarize Corporate Default experience and credit trends in 2010 and then discuss Moody s forecast for speculative-grade Corporate Default rates in This is followed by a review of 2010 rating accuracy metrics and the historical statistics on Corporate defaults, ratings transitions, ratings performance metrics, and recovery rates.

7 Finally, this report also includes several detailed sections describing the methodologies used to generate the statistics as well as a guide to their reading and interpretation. Defaults Slowed Down Considerably in 2010 2010 was a good year for the high yield debt market with respect to above-average returns and below-average defaults. Indeed, defaults dropped significantly last year mainly due to ample liquidity which helped some lowly rated companies avoid Default . World-wide, only 57 Moody s-rated Corporate issuers defaulted on a total of $ billion of debt in 2010,2 the lowest record in the past three years.

8 In comparison, 265 companies defaulted on a total of $ billion of debt in 2009 while 103 defaults were registered in 2008, affecting $ billion of debt. From a geographic standpoint, defaults remained concentrated in North America with 45 issuers defaulting in 2010. Meanwhile, only eight defaults were recorded in Europe, the second largest region for defaults. On a volume basis, defaulted debt totaled $ billion in North America compared to $ billion in Europe. Exhibit 1 presents annual Default counts and defaulted debt volumes for the period of 1970-2010.

9 EXHIBIT 1 Default Count and Volume Off Their Unprecedented Levels 050100150200250300$0$50$100$150$200$250$ 300$350197019711972197319741975197619771 9781979198019811982198319841985198619871 9881989199019911992199319941995199619971 9981999200020012002200320042005200620072 00820092010 Volu me ($Bil, Left Axis)Count (Right Axis) 1 The analysis of Default and rating transitions in this report is limited to Moody s-rated financial and non-financial Corporate issuers, including utility companies.

10 Consistent with prior year studies, this report s Default and transition rate statistics only cover issuers that have Moody s-rated bonds and/or loans and Default refers to debt Default as defined on page 61 . Unless otherwise specified, ratings in this report are issuer level, senior unsecured equivalent ratings which are derived from Moody s Senior Rating Algorithm. For more details, please see the Methodology and Data Sources section at the end of this report. 2 Including companies whose ratings were withdrawn prior to January 1, 2010 or were newly rated sometime in 2010, a total of 61 companies defaulted in 2010 with $ billion of debt impacted.