BUSINESS
09/22/2010 02:49 pm ET Updated May 25, 2011

'Corporate Bloodletting' Subsides As Default Rate Returns To Pre-Crisis Levels

Good news for corporations and the people who lend them money: The corporate default rate will likely drop to a pre-crisis level by year's end, according to new Moody's Investors Service analysis.

When Lehman Brothers filed for bankruptcy in September 2008 (the biggest filing in the nation's history), it set off a corporate credit crisis -- what the Wall Street Journal calls "corporate bloodletting" -- that caused massive collateral damage outside the financial world. An improvement in corporate credit could, among other things, help reduce unemployment.

According to the new report, Moody's, one of the three ratings agencies that dominate the market in evaluating corporate creditworthiness, struck 27 names from its list of companies rated at the very low B3 and added only 13 during this year's third quarter, the WSJ reports. The total number of companies on that list, called the "Bottom Rung," is now 195, compared to the high of 288 in June 2009. According to Bloomberg, 19 of those 27 departures were due to ratings upgrades, while the other eight companies were taken off either because their ratings were withdrawn or, as in Blockbuster's case, they defaulted.

The WSJ reports that Moody's says the corporate default rate should fall below 3 percent by the end of the year. To put that in perspective, it was 14.6 percent in November 2009 and 3.1 percent in August 2008, the month before Lehman collapsed. (Moody's senior vice president David Keisman told the WSJ the "rebound is breathtaking.")

As Bloomberg and the WSJ note, the low interest rates set by the U.S. Federal Reserve are partially to thank. Investors looking for high returns have bought risky corporate bonds, thereby strengthening those struggling companies and facilitating a boost in their credit rating.

The larger economy, though, still shows signs of trouble. August saw a record number of Americans lose their homes to foreclosure, even as banks tried to slow the foreclosure process to limit housing inventory on the market. The number of repossessed homes in August -- 95,364 -- was a 25 percent increase from August 2009.