Default Rate

A default rate in a rating agency context refers to the ratio of corporate, sovereign or overall defaults to the total number of entities rated. They are an input into capital markets pricing. If an investor’s forward market read is of a higher default rate, they are likely to exercise more caution around fair-value pricing or risk-reward calculations, especially in the low investment-grade or more particularly the sub-investment-grade, speculative-grade or high-yield arena and especially during times of economic stagnation or recession. Analysts will split their default rate analysis broadly into investment-grade and sub-investment-grade buckets, as well as by individual rating category, industry sector and geography.