Short-Term Rating Performance and Corporate Commercial ... · PDF fileSpecial Comment...

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Special Comment Short-Term Rating Performance and Corporate Commercial Paper Defaults, 1972-2004 Summary This report updates Moody's previous studies on short-term rating performance and the default experience of corpo- rate commercial paper issuers since 1972. Briefly, the study finds that: Short-term credit quality deteriorated sharply between 2001 and 2003. The average short-term rating down- grade-to-upgrade ratio was 11.2 for U.S. issuers during this period, more than four times higher than the histori- cal average of 2.3 from 1973 to 2000. The size of the U.S. corporate CP market has also shrunk noticeably since 2001, at least in part because of this deterioration in credit quality. However, the credit quality of issuers of commercial paper is, on average, very high. Since 1972, when the rating symbols were standardized in their current form, over 96% of Moody’s rated CP issuers were originally rated either P-1 or P-2. Between 1972 and 2003, a total of 52 issuers have defaulted on approximately $5.9 billion of rated and unrated CP. In the U.S., 19 issuers defaulted on a total of $3.1 billion of CP. In Europe, 18 issuers defaulted on a total of $1.3 billion of CP. Of the 52 defaulted issuers, 16 were rated by Moody’s at the time of default, with $3.3 billion of CP affected. Of these 16 defaults, 12 issuers were rated Not Prime at the time of default and 6 were rated either Not Prime or P-3 three months or more prior to default. Total commercial paper default volume reached a record peak in 2001 at over $1.4 billion. Moody's short-term ratings effectively differentiate the default risk. Over a 180-day horizon, P-1 rated issuers his- torically have a 0.01% probability of default. The frequency of default rises to 0.04%, 0.20% and 0.86% for P-2, P-3 and Not Prime issuers, respectively. Recently downgraded issuers experienced higher default rates than similarly rated issuers whose ratings had been stable. Commercial paper defaults have generally been event-risk driven and have often coincided with invest- ment-grade bond defaults. Moody’s data shows that an “orderly exit” mechanism is at work in the CP market. Conditional on a credit rating downgrade, rating withdrawal rates increase significantly for all rating categories. Moreover, a substantial propor- tion of prime-rated issuers that entered bankruptcy had no CP outstanding at the time of default. Unlike bondholders, in most cases holders of defaulted CP have ultimately been made whole. None of the defaults by issuers rated Prime-1 by Moody's at the time of issuance have resulted in any appreciable losses to investors. Commercial Paper Default Counts & Dollar Volume Totals 0 2 4 6 8 10 12 14 16 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Default Counts $0.0 $0.5 $1.0 $1.5 $2.0 Dollar Volume (USD Billions) Unrated Counts Rated Counts* Rated Volume* * CP rated at default New York Sharon Ou 1.212.553.1653 David T. Hamilton Richard Cantor Contact Phone October 2004

Transcript of Short-Term Rating Performance and Corporate Commercial ... · PDF fileSpecial Comment...

Special Comment

New YorkSharon Ou 1.212.553.1653David T. HamiltonRichard Cantor

Contact Phone

October 2004

Short-Term Rating Performance and Corporate Commercial Paper Defaults, 1972-2004

Summary

This report updates Moody's previous studies on short-term rating performance and the default experience of corpo-rate commercial paper issuers since 1972. Briefly, the study finds that:• Short-term credit quality deteriorated sharply between 2001 and 2003. The average short-term rating down-

grade-to-upgrade ratio was 11.2 for U.S. issuers during this period, more than four times higher than the histori-cal average of 2.3 from 1973 to 2000. The size of the U.S. corporate CP market has also shrunk noticeably since2001, at least in part because of this deterioration in credit quality.

• However, the credit quality of issuers of commercial paper is, on average, very high. Since 1972, when the ratingsymbols were standardized in their current form, over 96% of Moody’s rated CP issuers were originally ratedeither P-1 or P-2.

• Between 1972 and 2003, a total of 52 issuers have defaulted on approximately $5.9 billion of rated and unrated CP.In the U.S., 19 issuers defaulted on a total of $3.1 billion of CP. In Europe, 18 issuers defaulted on a total of $1.3billion of CP.

• Of the 52 defaulted issuers, 16 were rated by Moody’s at the time of default, with $3.3 billion of CP affected. Ofthese 16 defaults, 12 issuers were rated Not Prime at the time of default and 6 were rated either Not Prime or P-3three months or more prior to default. Total commercial paper default volume reached a record peak in 2001 atover $1.4 billion.

• Moody's short-term ratings effectively differentiate the default risk. Over a 180-day horizon, P-1 rated issuers his-torically have a 0.01% probability of default. The frequency of default rises to 0.04%, 0.20% and 0.86% for P-2,P-3 and Not Prime issuers, respectively.

• Recently downgraded issuers experienced higher default rates than similarly rated issuers whose ratings had beenstable. Commercial paper defaults have generally been event-risk driven and have often coincided with invest-ment-grade bond defaults.

• Moody’s data shows that an “orderly exit” mechanism is at work in the CP market. Conditional on a credit ratingdowngrade, rating withdrawal rates increase significantly for all rating categories. Moreover, a substantial propor-tion of prime-rated issuers that entered bankruptcy had no CP outstanding at the time of default.

• Unlike bondholders, in most cases holders of defaulted CP have ultimately been made whole. None of the defaultsby issuers rated Prime-1 by Moody's at the time of issuance have resulted in any appreciable losses to investors.

Commercial Paper Default Counts & Dollar Volume Totals

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Table of ContentsPage

2 Moody’s Special Comment

Summary ........................................................................................................................................................... 1

Introduction ........................................................................................................................................................ 3

An Overview of Commercial Paper Markets ........................................................................................................ 3

Moody's Short-Term Ratings .............................................................................................................................. 5

Short-Term Rating Transitions ............................................................................................................................ 6Cyclical Decline in Short-Term Credit Quality ................................................................................................................6Short-Term Rating Transitions ......................................................................................................................................6Early Exits and Conditional Defaults ..............................................................................................................................7

Commercial Paper Defaults .............................................................................................................................. 10

Recoveries on Defaulted Commercial Paper ..................................................................................................... 12

Conclusion ....................................................................................................................................................... 14

References ....................................................................................................................................................... 14

Appendix .......................................................................................................................................................... 15

Introduction

Short-term credit ratings are indicators of an issuer's ability and willingness to meet the contractual terms of its short-term debt obligations. Moody's short-term ratings scale is applied to many types of short-term debt obligations,including commercial paper, certificates of deposit, and other money market instruments. Moody's current short-termrating system was introduced in response to the default of the Penn Central railroad in 1971.1 As a large market with along rating history, corporate commercial paper (CP) often takes center stage in the discussion of short-term creditratings.2

The credit quality of commercial paper issuers is generally very high and the risk of default remote. However, cer-tain events have at times abruptly heightened investor sensitivity to the overall credit quality of commercial paper issu-ers. The Penn Central default was a watershed event that heightened concerns about credit quality in the U.S.commercial paper market.3 More recently, the marked increase in "fallen angels" and investment-grade defaultsbetween 2000 and 2002 increased investor concern about the credit quality of commercial paper issuers. Indeed, in2001 alone four Moody's-rated issuers defaulted on over $1.4 billion of CP, the highest level of defaults since 1989when five issuers defaulted on approximately $285 million of CP.

This report documents the short-term rating transition, default and recovery rates of Moody's-rated corporatecommercial paper issuers worldwide over the past 32 years. This study is part of Moody's ongoing research into theempirical default experience of commercial paper issuers that includes previous research such as Lucas and Noe (1989)and Fons and Kimball (1992). This study focuses on the corporate (including financial institutions) markets only. Thefirst section of this report is an overview of CP markets worldwide. The second section examines Moody's short-termrating system. The next section discusses patterns of Moody's short-term credit rating changes, which include esti-mates of the likelihood of upgrade, downgrade, and default associated with each of Moody's short-term rating catego-ries. The final section presents the examination of default and recovery experience of CP markets worldwide.

An Overview of Commercial Paper Markets

Commercial paper is an important, flexible source of short-term financing for the largest and most creditworthy cor-porations worldwide, providing them with a low-cost alternative to bank loans. Typically, CP is a senior level, unse-cured short-term note used to finance short-term credit needs, such as accounts receivable and inventory. In theUnited States, CP maturities generally range between 1 and 270 days, averaging about 45 days. In non-U.S. markets,commercial paper can have maturities up to 365 days (in rare cases, longer).

The market for commercial paper, once dominated by U.S. non-bank financial firms, has grown and diversifiedconsiderably in recent years. Changing economic conditions, innovations in financial technology (such as securitiza-tion), and secular changes in financial markets have transformed the CP market in several ways. In this section, webriefly review some of the notable trends that have recently affected the commercial paper markets.4

Since 1972, when the short-term rating symbols were standardized in their current form, Moody's has assignedCP ratings on over 3,500 corporate issuers worldwide. Over its entire history as a rated market, the CP market hasbeen dominated by issuers with very high credit quality. Exhibit 1 shows the growth in the number of outstandingPrime-rated and Not Prime-rated corporate CP issuers over the last 32 years. Between 1972 and 2004, the number ofoutstanding Moody's rated corporate CP issuers grew at a 3.3% annualized rate. Among Moody’s-rated CP issuers,over 96% were initially rated either P-1 or P-2. Although some of these issuers were downgraded over time, Prime-rated issuers still accounted for more than 90% of Moody’s rated universe. In comparison, the number of Not Primeissuers has been very small, particularly before the late 1980s. In fact, over 85% of Not Prime (“NP”) issuers wereoriginally Prime-rated.

As Exhibit 1 shows, the percentage of CP issuers rated Not Prime registered a notable increase in the last decade,reaching a record high of nearly 7% in 2003. Over that same time, the U.S. recorded two recessions, an increasing per-centage of rating downgrades, and sharp increases in corporate default rates. Concurrently, the total number of out-standing corporate CP issuers has fallen since 2001. The decline in overall number of corporate CP issuersoutstanding is largely due to three factors.

1. Moody's began assigning short-term ratings in 1971 using a simple Prime/Not Prime rating system.2. This study focuses only on commercial paper issuers by corporate entities, rather than structured vehicles such as issuance by asset-backed CP programs. The loss

experience in structured CP programs has been de minimus to date.3. Calomiris (1993) and Calomiris, Himmelberg, and Wachtel, (1994) discuss the impact and importance of the Penn Central default.4. Hahn (1993) provides a detailed overview of commercial paper markets.

Moody’s Special Comment 3

Exhibit 1 – Number of Commercial Paper Issuers by Rating Category

Firstly, the severe deterioration in credit quality diminished both the supply and demand for commercial paper. Aswe discuss in a later section of this report, the short-term rating downgrade-to-upgrade ratio increased sharplybetween 2001 and 2003. The deterioration in credit quality resulted in a decline in demand for CP by portfolio man-agers as they complied with risk-averse regulatory requirements. Money market mutual funds, the biggest holders ofcommercial paper in the U.S., are restricted by SEC Rule 2a-7 to hold only P-1 or P-2-rated commercial paper. Inaddition, these funds are generally not allowed to hold P-2 rated commercial paper exceeding 5% of their total assets.On the supply side, CP issuance has been trimmed as some firms (such as Lucent Technologies) have substituted CP,whose yield tended to rise as credit quality fell, with short-term bank borrowing.

Secondly, recent corporate governance and accounting scandals have shaken investor confidence, resulting inincreased uncertainty and reduced risk tolerance in the CP market. For example, in February 2002 when Tyco Interna-tional’s accounting misrepresentations were publicized, investors became less willing to roll over the company’s maturingcommercial paper. Concern over Tyco's credit quality ultimately led it to exit the CP market and sell its finance companysubsidiary. Exogenous events that call an issuer’s credit quality into question may also have consequences that resonatebeyond the issuer immediately affected, raising concern for its peers, its industry, and even the market as a whole.

Other factors that drove the contraction in the CP market include reductions in need for short-term financingduring the economic slowdown that started in 2001, and the historically low interest rates that have prevailed sincethat time. According to the Federal Reserve, the U.S. financing gap registered a total decline of approximately 116%between 2001 and 2003.5 Low interest rates decreased the demand for short-term financing as companies refinancedCP and other short-term debt with longer-dated debt, such as bonds.

The U.S. corporate CP market is the oldest and still the largest market. Although the CP market outside the U.S.has grown significantly in recent years, U.S. commercial paper still accounts for more than 70% of the total market. Inthe last couple of years, the USCP market has shrunk dramatically. As shown in Exhibit 2, the USCP market exhibitedmoderate growth between 1992 and 1996. Beginning in 1997, the total dollar volume of the market began to expandrapidly. The rising trend finally came to a stop in November 2000 when the volume of outstanding CP reached a peakof $986 billion. Since then, the market has declined notably. By the end of 2003, the CP outstanding has dropped to$571 billion, a decline of approximately 40% from its peak.

1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

P-1 272 282 284 300 352 383 426 527 604 656 689 716 768 777 795 828P-2 184 213 201 178 183 173 180 193 194 196 226 214 188 212 200 200P-3 27 30 17 13 10 10 11 10 14 14 18 14 15 15 28 18NP 0 0 0 0 0 0 0 0 0 0 6 1 1 11 15 15Total 483 525 502 491 545 566 617 730 812 866 939 945 972 1,015 1,038 1,061

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

P-1 901 918 929 952 975 987 1,019 1,045 1,019 1,025 975 1,024 1,012 903 834 779P-2 208 228 246 255 309 355 352 352 382 390 434 442 416 453 433 437P-3 32 36 48 47 47 47 43 38 32 32 40 44 66 59 48 56NP 14 46 54 56 54 45 46 58 61 77 73 71 64 84 94 77Total 1,155 1,228 1,277 1,310 1,385 1,434 1,460 1,493 1,494 1,524 1,522 1,581 1,558 1,499 1,409 1,349

5. The financing gap is defined as capital spending less cash flow, seasonally adjusted.

4 Moody’s Special Comment

Moody's Short-Term Ratings

Moody's short-term, "Prime" rating system applies to all senior/unsecured obligations with original maturities notexceeding one year. Moody’s short-term ratings — Prime-1, Prime-2, Prime-3, and Not Prime (abbreviated P-1, P-2,P-3 and NP, respectively) — represent Moody’s opinion of an issuer's ability to honor its short-term debt obligations.In contrast to long-term credit ratings, where expected credit loss is of primary concern and the ratings of specificlong-term debt obligations are "notched" away from the default-level rating to reflect severity of loss, Moody's short-term ratings concentrate only on the likelihood of default. Issuers rated P-1, P-2 and P-3 are expected to have superior,strong, and acceptable ability for repayment of short-term debt obligations, respectively.6 The P-1, P-2, and P-3 ratingcategories can be thought of as measures of distance in time from the NP rating decision. An issuer rated P-1 typicallywould have the longest distance in time before a weakening of the company’s financial strength would cause it to bedowngraded to NP. An NP rating indicates that an issuer is not sufficiently protected against the possibility of short-term default under a stressed scenario.

There is a high, though imperfect, correlation between an issuer's long-term and short-term ratings. Exhibit 3summarizes the correspondence between an issuer's short-term rating and the rating on its long-term senior unse-cured debt. As shown in the table, issuer’s long-term rating is highly positively correlated to its short-term rating. Issu-ers enjoying high long-term rating are more likely to be assigned high short-term rating and vice versa. For example,all issuers with Aaa and Aa long-term ratings possess P-1 short-term ratings. For issuers with long-term A ratings, thepercentage is somewhat lower. Nevertheless, more than 76% of A-rated issuers have P-1 short-term ratings, whileover 23% are associated with P-2 short-term ratings. For Baa long-term rated issuers, their short-term ratings rangefrom P-2 to P-3, with more than 84% at P-2. For speculative-grade Ba- and B-rated issuers, their short-term ratingsare always Not Prime.

Exhibit 3 – Joint Distribution of Short-Term and Long-Term Ratings for CP Issuers, 1972-2004

Exhibit 2 – Outstanding Volume of USCP (US$ Billions)

Source: Federal Reserve

6. Moody’s Rating Symbols & Definitions, August 2003.

Long- Term RatingShort-Term Rating

P-1 P-2 P-3 NPAaa 100.0% 0.0% 0.0% 0.0%Aa 100.0% 0.0% 0.0% 0.0%A 76.5% 23.4% 0.1% 0.0%Baa 0.0% 84.7% 15.3% 0.0%Ba 0.0% 0.0% 0.0% 100.0%B 0.0% 0.0% 0.0% 100.0%

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$986 billion(Nov-2000)

$571 billion(Dec-2003)

Moody’s Special Comment 5

Short-Term Rating Transitions

Cyclical Decline in Short-Term Credit QualityAs discussed in an earlier section, the USCP market has shrunk in the past three years partly due to the deterioration inshort-term credit quality. But how bad has this deterioration actually been? To illustrate the severity of the trend,Exhibit 4 shows the annual short-term rating downgrade-to-upgrade ratio for Moody’s-rated US commercial paperissuers from 1973 to 2003.7 Our estimate of the short-term rating downgrade-to-upgrade ratio is simply the numberof issuers downgraded divided by issuers upgraded annually. A ratio greater than 1 indicates that short-term ratingdowngrades outnumbered rating upgrades. The downgrade-to-upgrade ratio has deteriorated from less than 1:1 in1995 to 15:1 in 2002. Additionally, the average downgrade-to-upgrade ratio between 2001 and 2003 was 11.2, morethan four times higher than the long-term average of 2.3 from 1973 to 2000. As Exhibit 4 shows, there is considerablevariation in the ratio from year to year reflecting changes in aggregate credit quality. The years 1990 and 2002 standout as years of particular stress in the CP market. Although short-term rating downgrades continue to dominateupgrades, the downgrade-upgrade ratio registered its first year of improvement since 1999 in 2003, paralleling theimprovement in credit quality reflected in the long-term rating drift statistics over the same time period.

Short-Term Rating TransitionsWhile the downgrade-upgrade ratio is a useful indicator of changes in aggregate short-term credit quality, more infor-mation is available in rating transition matrices where the frequency, magnitude, and direction of rating changes issummarized. Rating transitions are of interest to a wide variety of market participants. A downgraded issuer typicallycannot place as much paper as desired and must rely on other, more expensive types of financing. Therefore, for issuersrelying on continued access to the CP market for project finance, a decline in credit quality as indicated by a down-grade could seriously affect the costs of completing the project. On the investors side, an investor holding downgradedCP faces an even less liquid secondary market than usual. If regulations require the investor to close out the position,excess losses could be incurred.

The rating transition matrices presented in Exhibit 5 summarize the historical probability, magnitude, and direc-tion of rating changes, including default, for specific time horizons.8 The matrices show the historical frequency of aCP issuer with the given row rating migrating to another rating category, to default, or to withdrawn rating9 status bythe end of the specified time horizon. The percentages presented here are weighted averages of the estimated transi-tion probabilities for each complete period from 1972 through 2003, where the weights are based on the size of therated issuer pool at the start of each period. For example, P-2 rated issuer has a 96.5% historical probability of retain-ing its rating over a 60-day time horizon, a 0.88% probability of an upgrade to P-1, and a 0.92% probability of down-grade to P-3.

7. The ratio depicted in Exhibit 4 weights CP issuers equally, but is not weighted by the magnitude of the rating changes. Additionally, the chart does not include short-term rating actions on other money market instruments, such as bank loans.

Exhibit 4 – Annual Short-Term Rating Downgrade-Upgrade Ratio

8. The results shown in Exhibit 5 are calculated on an issuer (equally weighted) basis.9. Credit rating changes, rating withdrawals, and defaults are treated as mutually exclusive states in Exhibit 5. For example, a rating downgrade due to an event of default

is categorized as a default only.

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6 Moody’s Special Comment

Exhibit 5 – Average Short-Term Rating Transition Rates, 1972-2003

The matrices indicate that the further down the rating scale an issuer moves, the less stable the Prime ratingbecomes at any time horizon. The likelihood of a change to another Prime rating category and the likelihood of a rat-ing withdrawal both increase as the short-term rating declines. The P-3 rating category has the lowest probability ofbeing maintained over any time horizon. One explanation for the relatively low stability of P-3 issuers is that they arefaced with powerful incentives to either strive for a higher rating or find other sources of short-term financing, as mostCP investors are prevented from holding P-3 paper by SEC regulations. Consequently, P-3 rated issuers are morelikely to transition out of their Prime rating category than higher rated issuers.

Exhibit 5 also shows that the probability of default increases for successively lower rating categories. For example,over the 180-day horizon, P-1 rated issuers historically had only 0.01% probability of default. The risk of default risesto 0.04%, 0.20% and 0.86% for P-2, P-3 and NP issuers respectively. Default frequencies naturally become greater asthe time horizon lengthens. For example, as the horizon increases from 180 days to 365 days, the default probabilityfor P-3 issuers rises from 0.20% to 0.56% and the default probability for P-2 issuers rises from 0.04% to 0.11%.

Early Exits and Conditional DefaultsWhen an issuer’s fundamental credit quality deteriorates, it is typically forced to exit the market via an ‘orderly exit’mechanism. Generally speaking, a weakening of an issuer’s credit is typically accompanied by a refusal by investors toroll over maturing CP. In this way, the market compels the issuing firm to reduce or eliminate its CP financing. Firmsin this situation must replace the maturing CP with an alternative and presumably more costly form of financing that is

Horizon (days)

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P-1 P-2 P-3 NP WR Default*

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P-1 99.21% 0.37% 0.00% 0.01% 0.41% 0.00%P-2 0.44% 98.28% 0.48% 0.08% 0.72% 0.00%P-3 0.03% 1.19% 94.67% 2.07% 2.01% 0.04%NP 0.00% 0.07% 0.56% 96.87% 2.32% 0.18%

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P-1 98.38% 0.74% 0.01% 0.01% 0.86% 0.00%P-2 0.88% 96.50% 0.92% 0.21% 1.48% 0.01%P-3 0.06% 2.39% 89.79% 3.72% 3.98% 0.06%NP 0.00% 0.17% 1.12% 93.89% 4.50% 0.32%

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P-1 97.56% 1.10% 0.02% 0.02% 1.30% 0.00%P-2 1.33% 94.76% 1.30% 0.33% 2.26% 0.01%P-3 0.10% 3.55% 85.28% 5.08% 5.90% 0.09%NP 0.00% 0.26% 1.68% 91.11% 6.51% 0.45%

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P-1 96.74% 1.45% 0.03% 0.03% 1.74% 0.00%P-2 1.76% 93.05% 1.64% 0.47% 3.05% 0.02%P-3 0.14% 4.72% 81.15% 6.08% 7.80% 0.12%NP 0.00% 0.34% 2.23% 88.52% 8.31% 0.59%

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P-1 95.11% 2.13% 0.06% 0.05% 2.63% 0.01%P-2 2.61% 89.73% 2.22% 0.76% 4.64% 0.04%P-3 0.18% 7.03% 73.58% 7.48% 11.52% 0.20%NP 0.00% 0.52% 3.34% 83.79% 11.49% 0.86%

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P-1 92.72% 3.09% 0.12% 0.10% 3.97% 0.01%P-2 3.85% 84.99% 2.85% 1.18% 7.07% 0.07%P-3 0.28% 10.45% 63.95% 8.41% 16.52% 0.39%NP 0.00% 0.82% 4.91% 77.45% 15.59% 1.23%

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P-1 90.39% 3.95% 0.18% 0.16% 5.32% 0.02%P-2 5.00% 80.58% 3.31% 1.54% 9.46% 0.11%P-3 0.42% 13.50% 56.20% 8.66% 20.66% 0.56%NP 0.00% 1.22% 6.21% 71.86% 19.07% 1.64%

* Includes issuers that held rated CP on the cohort formation date and defaulted by the end of the time horizon, regardless of whether or not they had CP outstanding at the time of default (some did not).

Moody’s Special Comment 7

more consistent with a low investment-grade or a speculative-grade credit quality. One result of these forced, earlyexits is that short-term markets avoid the higher levels of default risk found in the long-term debt markets. Since 1972,a total of 70 CP issuers either missed a scheduled interest payment on commercial paper or filed for bankruptcy within5 years of holding a short-term rating (see Exhibit 14 in the appendix). A total of 54 (or over 77%) of those issuersexited the CP market before they defaulted.

Evidence of the early exit phenomenon can be found by comparing empirical estimates of the default rate basedon the standard cohort method to default rate estimates that remove issuers whose CP has been withdrawn. The twomethods are shown in Exhibit 6. The first row labeled "Cohort" is the probability of an issuer holding the given rowrating on the cohort formation date defaulting by the end of the given transition horizon regardless of whether it hadCP outstanding at the end of the transition horizon. For example, WorldCom did not have commercial paper out-standing at the time of its bankruptcy. It did, however, have rated CP outstanding within 365 days of the bankruptcydate. The "Cohort" row includes WorldCom's default in the calculation for the 365-day default rate.

The second row for each rating category, labeled "Adjusted", adjusts the numerator in the default rate calculationby subtracting those issuers that had no Moody's-rated CP outstanding at the time of their bankruptcy. 10 Using thesame example as above, WorldCom would not count in any of these default calculations since it did not have rated CPoutstanding at the time of default. As shown in Exhibit 6, default rates calculated by this method are considerablylower than the comparable number calculated by the first methodology, particularly for lower rating categories. Thisimplies that a significant proportion of issuers, especially the lower-rated ones, exited the market prior to default.

Exhibit 6 – Commercial Paper Issuer Default Rates, 30- to 365-Day Horizons

In Exhibit 7, we compare the historical (unconditional) probability of a rating withdrawal and default (using thecohort method of default rate calculation) to those that experienced rating downgrades prior to withdrawal or default.For example, a NP-rated issuer historically has only a 2.3% unconditional likelihood of being withdrawn within a 30-day period. However, the likelihood of a rating withdrawal for a NP-rated issuer who has experienced a rating down-grade in the prior 30 days jumps to 5.7%. As Exhibit 7 shows, the result generalizes to nearly all rating categories andtransition horizons: an issuer who has experienced a prior rating downgrade has a higher chance of being withdrawn.The results are qualitatively similar to Crabbe and Post (1992), which found that CP outstanding declined by 15.7% inthe first four weeks after a Moody's CP rating downgrade.

10. These figures represent a lower bound on the estimated default rate of Moody's-rated CP issuers. The numerator of the default rate (issuers that defaulted with rated CP) is precisely estimated; however, the denominator is an approximation since the timing of rating withdrawal for CP is not known precisely.

Rating Method 30 60 90 120 180 270 365

P-1Cohort* 0.00% 0.00% 0.00% 0.00% 0.01% 0.01% 0.02%Adjusted** 0.00% 0.00% 0.00% 0.00% 0.01% 0.01% 0.02%

P-2Cohort* 0.00% 0.01% 0.01% 0.02% 0.04% 0.07% 0.11%Adjusted** 0.00% 0.01% 0.01% 0.02% 0.03% 0.05% 0.07%

P-3Cohort* 0.04% 0.06% 0.09% 0.12% 0.20% 0.39% 0.56%Adjusted** 0.04% 0.04% 0.05% 0.06% 0.08% 0.17% 0.26%

NPCohort* 0.18% 0.32% 0.45% 0.59% 0.86% 1.23% 1.64%Adjusted** 0.05% 0.10% 0.14% 0.17% 0.21% 0.22% 0.22%

* Includes issuers that had rated CP on the cohort formation date and defaulted by the end of the time horizon.** Includes only issuers that held rated CP on the default date.

8 Moody’s Special Comment

Exhibit 7 – Rating Withdrawals and Defaults Conditional on Rating Downgrade, 1972-2003

Similar to the results found for corporate bond issuers' long-term credit ratings,11 the probability of defaultincreases considerably conditional on a short-term rating downgrade. For instance, the average default probability forP-3 issuers is 0.09% on average over a 90-day period. Conditional on a downgrade over the previous 90 days, thedefault probability is five times higher at 0.44%. While the impact of rating history on default probabilities is evidentat all horizons, the increase in default risk among recently downgraded firms is strongest for issuers downgraded to P3or NP. Exhibit 7 further shows that relative withdrawn rating rates and default rates conditional on downgrade widenas the credit rating falls and as the time horizon lengthens. To summarize, these results indicate that when an issuer’scredit rating is lowered, (i) it has a higher likelihood of exiting the market; and (ii) has a higher risk of default.

In Exhibit 8 below we illustrate how short-term rating actions are correlated with long-term bond rating changes.The ratios in the table reflect the frequencies of long term rating changes within one year of a short-term ratingchange. For example, issuers who experienced a short-term rating downgrade historically had an 84% chance of seeingits long-term bond rating being cut on the same day or in the next 12 months. For cases where an issuer’s short-termrating was upgraded, the issuers’ long-term bond moved in the same direction about 76% of the time within a yearfrom the short-term rating upgrade. The frequencies in this table show that long-term rating changes are positivelycorrelated with short-term rating changes. In addition, issuers whose short-term ratings were upgraded had a zero his-torical probability of default on its long-term bonds within a year of the short-term rating upgrade. A withdrawal of ashort-term rating appears to be a neutral event for long-term ratings: long-term ratings exhibit an over 61% chance ofremaining unchanged, approximately an 11% probability of an upgrade, and a 17% likelihood of a downgrade.

Horizon Rating

Rating Withdrawal Rate Default Rate

Downgraded Unconditional Downgraded Unconditional

P-2 0.28% 0.72% 0.00% 0.00%30-day P-3 3.26% 2.01% 0.77% 0.04%

NP 5.70% 2.32% 1.14% 0.18%

P-2 1.38% 1.48% 0.00% 0.01%60-day P-3 6.26% 3.98% 0.51% 0.06%

NP 12.31% 4.50% 1.19% 0.32%

P-2 2.40% 2.26% 0.00% 0.01%90-day P-3 8.99% 5.90% 0.44% 0.09%

NP 16.98% 6.51% 1.65% 0.45%

P-2 3.22% 3.05% 0.00% 0.02%120-day P-3 12.37% 7.80% 0.35% 0.12%

NP 20.98% 8.31% 2.01% 0.59%

P-2 5.19% 4.64% 0.00% 0.04%180-day P-3 19.16% 11.52% 0.42% 0.20%

NP 26.60% 11.49% 2.26% 0.86%

P-2 8.23% 7.07% 0.00% 0.07%270-day P-3 25.04% 16.52% 0.66% 0.39%

NP 31.51% 15.59% 2.46% 1.23%

P-2 10.77% 9.46% 0.05% 0.11%365-day P-3 28.11% 20.66% 0.81% 0.56%

NP 33.85% 19.07% 3.07% 1.64%

11. Hamilton and Cantor (2004)

Moody’s Special Comment 9

Exhibit 8 – Correlation of Short-Term and Long-Term Rating Changes

Commercial Paper Defaults

Moody's defines a commercial paper default as any delayed, foregone, or incomplete disbursement of principal orinterest (in those rare cases in which CP takes the form of an interest-bearing note). This definition includes forcedrollovers and delayed payments that are allowed for under the terms of the notes, as well as bankruptcy by the issuer.While conservative, we believe this definition to be the one most closely aligned with commercial paper investors'expectations.

Using this definition of default, Moody's research has uncovered 52 corporate issuers, rated and unrated, whichdefaulted on a total of $5.9 billion of CP since 1972. Exhibit 9 presents a list of Moody's-rated issuers that had com-mercial paper outstanding at the time of their default. We also provide a full list of commercial paper defaulters thatwere rated by Moody’s within 5 years of default in the appendix. A total of 70 commercial paper issuers were rated byMoody's within 5 years of default between 1972 and 2004.

Exhibit 9 – Moody's-Rated Commercial Paper Defaults, 1982-2003

The chart on the cover of this report shows the time series of issuer counts and total dollar volume of rated andunrated CP defaults. Between 1972 and 1988, there was only one rated CP default: Manville Corp. Manville Corp.defaulted on $15 million of CP (or approximately 0.01% of the total $166 billion of U.S. CP outstanding at the time)in 1982. The year 1989 experienced the largest number of rated CP defaults on record, with 5 issuers defaulting on atotal of $285 million of CP. Despite the small number of defaults in 1994 and 1997, total default volume in those yearswas notably large at over $400 million. Mercury Finance was the largest default in this period. The company’s defaultbegan in January 1997 when it failed to repay $17 million in CP, after revealing that it had overstated earnings since1993 by a total of $91 million.

The year 2001 experienced the highest recorded CP default volume over the past 32 years. In 2001 four rated issu-ers defaulted on a total of over $1.4 billion of CP. The largest defaults were Southern California Edison and PacificGas & Electric Company. These two companies, together with PG&E Corporation, had a total of $1.4 billion of CPoutstanding at the time of default. Comdisco was the most recent rated commercial paper default recorded by

Bond Rating Action

CP Rating Action Downgraded Unchanged Upgraded Default Withdrawn

Downgraded 84.1% 10.2% 0.0% 1.7% 4.0%Unchanged 12.9% 76.7% 7.2% 0.2% 3.0%Upgraded 0.2% 22.9% 76.0% 0.0% 0.9%Withdrawn 16.5% 61.9% 11.7% 1.4% 8.4%

Issuer Name Default DateDefault

Vol**

Ratings X days prior to defaultInitial Rating of

Defaulting Notes0 30 60 90 120 180 270 365

Manville Corp. 08/26/1982 15.2 P-2 P-2 P-2 P-2 P-1 P-1 P-1 — P-2Wang Credit Corporation 08/16/1989 100 NP NP NP NP NP P-3 P-3 P-3 NPWang Laboratories Inc. 08/16/1989 96 NP NP NP NP NP P-3 P-3 P-3 NPColorado-Ute Financial Service Corp. 08/17/1989 19 NP NP NP NP P-1 P-1 P-1 P-1 P-1Lomas Financial Corp. 09/01/1989 17 NP NP NP P-3 P-3 P-3 P-3 P-3 NPEquitable Lomas Leasing Corp. 09/12/1989 53 NP P-3 P-3 P-3 P-2 P-2 P-2 P-2 P-3Columbia Gas System Inc. 06/20/1991 268 NP P-2 P-2 P-2 P-2 P-2 P-2 P-2 P-2UNI Storebrand 08/25/1992 293 NP P-3 P-2 P-2 P-2 P-2 P-2 P-2 P-2Metallgesellschaft Aktiengesellschaft 01/07/1994 292.8 NP P-2 — — — — — — P-2Metallgesellschaft Finance B.V. 01/07/1994 200 NP P-2 — — — — — — P-2Mercury Finance Company 01/31/1997 437 NP P-2 P-2 P-2 P-2 P-2 P-2 — P-2Armstrong World Industries, Inc. 11/22/2000 50 NP P-2 P-2 P-2 P-2 P-2 P-2 P-2 P-1Southern California Edison Company 01/16/2001 531 P-3 P-1 P-1 P-1 P-1 P-1 P-1 P-1 P-1Pacific Gas & Electric Company 01/17/2001 684 P-3 P-1 P-1 P-1 P-1 P-1 P-1 P-1 P-1PG&E Corporation 01/17/2001 189 P-3 P-1 P-1 P-1 P-1 P-1 P-1 P-1 P-2Comdisco, Inc. 07/16/2001 28 NP NP NP NP P-2 P-2 P-2 P-2 P-2

* Includes only issuers that held rated CP on the default date.** USD Millions

10 Moody’s Special Comment

Moody’s. According to the company’s 10-K filing, Comdisco had $28 million of CP outstanding when it filed forChapter 11.

One of the trends clearly discernable from the cover chart is that CP defaults have closely tracked broader corpo-rate credit trends. Combining this fact with the information shown in Exhibit 9, we also find that CP defaults tend tobe highly correlated with investment-grade corporate defaults. This finding is not too surprising given the fact thatcorporate CP issuers tend to be high credit quality firms. Exhibit 10 presents the annual default rates for commercialpaper issuers and investment-grade corporate bond issuers from 1980 to 2003. As shown in the chart, the default ratefor commercial paper issuers tends to be high when the default rate for investment-grade corporate bond issuers ishigh. Many investment-grade defaults and CP defaults have historically arisen from bankruptcies caused by exogenousevents (such as asbestos litigation in the case of Manville Corp.) or sudden re-valuation of a firm following revelationof accounting misstatements (for example, Mercury Finance).

Exhibits 11 and 12 present rated and unrated CP defaults broken out into issuer domiciles and industry sectors,respectively, measured both as a percentage of total dollar volume and percentage of issuer counts between 1972 and2004. The United States, the largest market of commercial paper, has produced the greatest proportion of defaults interms of issuer counts and total dollar volume. Measured by total default volume, over 53% of defaulted CP originatedfrom the U.S. The second largest default territory was Canada, which contributed 13% of defaults by total default vol-ume. The UK, Norway, and Germany followed with roughly 5% of the total volume apiece. Measured on a defaultcount basis, the U.S. tops the list with 36% of defaults. Sweden and Mexico turned out be the second and third largestcontributors, with 14% and 10% of defaults respectively. They are followed by Canada, the UK, France, Spain, Fin-land, Brazil, Argentina, and Indonesia, each of which saw 4% of the share of total default counts.

Non-bank financial companies have historically been the largest issuers of CP, and have also experienced the high-est default rates. As shown in Exhibit 12, the non-bank financial sector has dominated CP defaults, with 45% of totaldollar volume (a total of $2.6 billion) and 36% of total issuer counts (19 issuers). Measured by defaulted volume, theutility sector has experienced the second highest level of defaults with $1.7 billion total dollar volume, or 29.4%. Thedefaults by the two California utility companies largely accounts for this segment.

Exhibit 10 – Annual Commercial Paper and Investment-Grade Default Rates*

*Includes only issuers with rated commercial paper outstanding at the time of default.

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

CP Default Rate

IG Default Rate

Moody’s Special Comment 11

Exhibit 11 – Defaults by Country of Domicile, 1972-2004

Exhibit 12 – Defaults by Industry Category, 1972-2004

Recoveries on Defaulted Commercial Paper

Although Moody's short-term credit ratings do not explicitly address loss severity in the event of default, investors arenevertheless interested in the recovery value they may expect if a default does occur. As a senior unsecured debt instru-ment, commercial paper investors are typically ranked pari passu with other unsecured creditors in payment priority inbankruptcy; that is, behind bank loans and holders of secured debt, but ahead of junior creditors such as holders of sub-ordinated debt. Exhibit 13 summarizes the ultimate recovery experience of 16 (rated and unrated) commercial paperdefaults for which we have reliable data. The results of our survey of recovery rates indicates that defaulted CP doesindeed experience higher recovery rates than junior obligations,12 and that ultimate CP recoveries are nominally quitehigh.

Domain Volume Counts

United States 53.5% 36.5%Canada 13.0% 3.8%United Kingdom 5.0% 3.8%Norway 5.0% 1.9%Germany 5.0% 1.9%New Zealand 4.6% 1.9%Netherlands 3.4% 1.9%Sweden 3.1% 13.5%Brazil 2.6% 3.8%Mexico 1.3% 9.6%Philippines 1.3% 1.9%France 1.1% 3.8%Indonesia 0.5% 3.8%Argentina 0.3% 3.8%Spain 0.2% 3.8%Finland 0.0% 3.8%

Total Default Counts: 52Total Default Volume: $5.9 billion

Industrial Group Volume Counts

Financial (Non-Bank) 44.6% 36.5%Utilities 29.4% 13.5%Industrial 11.9% 26.9%Banking 8.5% 5.8%Consumer Products 2.0% 5.8%Technology 1.7% 1.9%Miscellaneous 1.1% 3.8%Transportation 0.6% 1.9%Hotel, Gaming, & Leisure 0.2% 3.8%

Total Default Counts: 52Total Default Volume: $5.9 billion

12. The comparison is not explicitly made here. See Varma (2003) for a study of comparative recovery rates across the capital structure.

12 Moody’s Special Comment

Exhibit 13 – Recovery Survey for Commercial Paper Defaults

In the majority of the commercial paper defaults listed in Exhibit 13, CP holders ultimately received full paymentof principal. In cases in which the payment delay was significant and an appreciable amount of interest had accrued,interest was also returned in full. Hence, nominal losses to investors in these cases were generally near zero. Only inthe default of Lomas Financial Corp. and Mercury Finance Company were CP holders' claims impaired. After morethan two years of delay, investors in Lomas' $17.3 million of defaulted CP were awarded a package of cash and securi-ties amounting to only about 75% of their claim. For Mercury Finance’s CP holders, they received new senior securednotes equal to 75% of the face value of their claims in addition to all the initial equity in the reorganized company.

Given the rarity of CP defaults, the small data set, and highly situation-specific factors influencing recovery rates,13 one cannot conclude that commercial paper recoveries in default are systematically higher than those of other unse-cured creditors, which rarely recover full face value. We can, however, identify some factors particular to the capitalstructures of the defaults listed in Exhibit 13 that may explain their high recovery rates. Firstly, 10 of the 16 defaulterslisted in Exhibit 13 had no other significant unsecured debt outstanding at the time of default, leaving them in a favor-able position behind senior creditors. Secdonly, those that did have senior unsecured debt outstanding experiencedrecovery rates far above the historical average. For example, Columbia Gas System and Southern California Edisonsenior unsecured bondholders both ultimately received full recovery of their claims. A full analysis of the factors influ-encing recovery rates for CP is beyond the scope of this report, however.

Defaulter Name Default DateEstimatedRecovery Recovery Description

Manville Corp. 08/26/1982 100% In November 1988, investors received securities and cash equal to principal and accrued interest.

Wang Credit Corporation 08/16/1989 100% Principal and interest repaid.

Wang Laboratories Inc. 08/16/1989 100% Principal and interest repaid.

Colorado-Ute Financial Service Corp 08/17/1989 99% Investors were paid back principal by December 1992 and most of the interest by early 1993.

Lomas Financial Corp. 09/01/1989 75% In January 1992, CP investors received securities and cash amounting to approximately 75% of their claim.

Equitable Lomas Leasing Corp. 09/12/1989 100% Made interest payments until 4/30/90 when notes were fully repaid.

UNI Storebrand A/S 08/25/1992 100% Investors received interest and principal in cash by 1993.

Columbia Gas System, Inc. 06/20/1991 100% In November 1995, investors received interest and principal due, together with interest at LIBOR + 2%. Paid partly in cash and partly in new securities.

Metallgesellschaft Aktiengesellschaft 01/07/1994 100% Investors received principal back less than one month after default.

Metallgesellschaft Finance B.V. 01/07/1994 100% Investors received principal back less than one month after default.

Grupo Simec S.A. de C.V. 03/15/1995 100% Investors received principal two days after default.

Grupo Situr S.A. de C.V. 03/15/1995 100% Investors received principal two days after default.

Kapital Haus S.A. de C.V. 03/14/1995 100% Investors received principal three days after default.

Mercury Finance Company 01/31/1997 75% In March 1999, Mercury emerged from bankruptcy. As part of its reorganization plan, investors agreed to exchange 75% of the principal of the outstanding CP with new secured notes.

Southern California Edison 01/16/2001 100% In April 2001, the company repaid past due interest. In March 2002, investors received full principal payment including accrued interest.

Pacific Gas & Electric Company 01/17/2001 100% In May 2002, the company repaid past due interest. In April 2004, it emerged from Chapter 11 and paid CP claims in full.

13. As we noted earlier in this report, many commercial paper defaulters formerly held investment-grade long-term ratings and were the consequence of exogenous events, liquidity shocks, or other factors that would not necessarily impact recovery in default.

Moody’s Special Comment 13

Conclusion

The marked increase in "fallen angels" and investment-grade defaults between 2000 and 2002 heightened investorconcern about the credit quality of commercial paper issuers. Since Moody's last report on commercial paperdefaults in the year 2000, four Moody's-rated issuers defaulted on over $1.4 billion of CP, the highest level ofdefaults since 1989 when five issuers defaulted on $285 million of CP. The increase in credit risk, even among highcredit-quality issuers, has also contributed to a decline in the total dollar volume outstanding of corporate commer-cial paper since 2001.

The results of this study show that Moody's short-term ratings effectively differentiate the default risk of commer-cial paper issuers: default rates increase monotonically as ratings fall and increase as time horizon lengthens. We alsofound that, conditional on a credit rating downgrade, rating withdrawal rates and default rates increase significantly forall rating categories. Finally, commercial paper was found to experience very high recovery rates in the event of default,with a median recovery rate of 100%.

References

Calomiris, C. W., C. P. Himmelberg, P Wachtel (1994), "Commercial Paper, Corporate Finance, and the BusinessCycle: A Microeconomic Perspective," NBER Working Paper No. 4848.

Calomiris, C. W. (1993), " Is the Discount Window Necessary? A Penn-Central Perspective," NBER Working PaperNo. W4573.

Crabbe, L. and M. A. Post (1992), "The Effect of a Rating Change on Commercial Paper Outstandings," Board ofGovernors of the Federal Reserve System, January.

Fons, J. and A. E. Kimball (1992), "Defaults and Orderly Exits of Commercial Paper Issuers," Moody's Global CreditResearch, February.

Hahn, T. K. (1993), "Commercial Paper," Federal Reserve Bank of Richmond Economic Quarterly, Volume 79/2Spring.

Hamilton, D. and R. Cantor (2004), "Rating Transition and Default Rates Conditioned on Outlooks," Journal ofFixed Income, September.

Hamilton, D., P. Varma, and S. Ou (2004), "Default and Recovery Rates of Corporate Bond Issuers," Moody's GlobalCredit Research, January.

Lucas, D. J. and D. E. Noe (1989), "Defaults and Orderly Exits of U.S. and European Commercial Paper Issuers,"Moody's Global Credit Research.

Varma, P. (2003), "Recovery Rates on Defaulted Corporate Bonds and Preferred Stocks, 1982-2003," Moody's GlobalCredit Research, December.

14 Moody’s Special Comment

Appendix

Exhibit 14 – Issuers Defaulting within 5 Years of Exiting the CP Market

Issuer NameRated CP at

Default?

IssuerDefault

Date

Ratings t days prior to defaultInitialRating0 30 60 90 120 180 270 365

Armstrong World Industries, Inc. yes 11/22/00 NP P-2 P-2 P-2 P-2 P-2 P-2 P-2 P-1Bank of New England Corporation no 01/07/91 WR WR WR WR WR WR NP NP P-2Charter Medical Corporation no 06/02/92 WR WR WR WR WR WR WR WR P-1Chase Manhattan Mortgage and Realty Trust no 02/15/79 WR WR WR WR WR WR WR WR P-1Colorado-Ute Financial Service Corp. yes 08/17/89 NP NP NP NP P-1 P-1 P-1 P-1 P-1Columbia Gas System Inc. yes 06/20/91 NP P-2 P-2 P-2 P-2 P-2 P-2 P-2 P-2Comdisco, Inc. yes 07/16/01 NP NP NP NP P-2 P-2 P-2 P-2 P-2Dow Corning Corporation no 05/15/95 NP NP NP NP NP NP NP P-2 P-2Edison Brothers Stores, Inc. no 11/03/95 WR WR WR WR WR P-3 P-2 P-2 P-2El Paso Electric Company no 01/08/92 WR WR WR WR WR NP NP NP P-1Enron Corporation no 12/02/01 NP P-2 P-2 P-2 P-2 P-2 P-2 P-2 P-2Enstar Group Inc. no 05/31/91 WR WR WR WR WR WR WR WR P-1Equitable Lomas Leasing Corp. yes 09/12/89 NP P-3 P-3 P-3 P-2 P-2 P-2 P-2 P-3Federated Department Stores no 01/15/90 WR WR WR WR WR WR WR WR P-1Finova Capital Corporation no 03/07/01 NP NP NP NP NP NP P-3 P-2 P-3First City Bancorporation of Texas, Inc. no 11/23/92 NP NP NP NP NP NP NP NP P-1First RepublicBank Corporation no 07/30/88 NP NP NP NP NP NP NP NP P-1Food Fair, Inc. no 10/02/78 WR WR WR WR WR WR WR WR P-3Frontier Corporation no 01/27/02 WR WR WR WR NP NP NP NP P-1HomeFed Corporation no 10/22/92 WR WR WR WR WR WR WR WR P-1IFRB Corporation no 07/30/88 WR WR WR WR WR WR WR NP P-1Insilco Technologies, Inc. no 01/14/91 WR WR WR WR WR WR WR WR P-3Interco, Inc. no 01/25/91 WR WR WR WR WR WR WR WR P-2Jim Walter Corporation no 12/27/97 WR WR WR WR WR WR WR WR P-2Kendall Company no 05/20/92 WR WR WR WR WR WR WR WR P-2Kmart Corporation no 01/22/02 NP NP P-3 P-3 P-3 P-3 P-3 P-3 P-1Lomas & Nettleton Mortgage Investors no 10/25/93 WR WR WR WR WR WR WR NP P-2Lomas Financial Corp. yes 09/01/89 NP NP NP P-3 P-3 P-3 P-3 P-3 NPLomas Mortgage USA, Inc. no 10/10/95 WR WR WR WR WR WR WR WR P-2Manville Corp. yes 08/26/82 P-2 P-2 P-2 P-2 P-1 P-1 P-1 — P-2Maxwell Communications Corporation plc. no 12/16/91 NP NP NP NP NP NP NP NR NPMcCrory Corp. no 02/26/92 NP NP NP NP NP NP NP NP NPMCorp no 03/27/89 WR NP NP NP NP NP NP NP P-1Mercury Finance Company yes 01/31/97 NP P-2 P-2 P-2 P-2 P-2 P-2 — P-2Metallgesellschaft Aktiengesellschaft yes 01/07/94 NP P-2 — — — — — — P-2Metallgesellschaft Finance B.V. yes 01/07/94 NP P-2 — — — — — — P-2Mirant Corporation no 07/15/03 WR WR WR WR WR WR WR NP P-2National Gypsum Company no 10/28/90 WR WR WR WR WR WR WR WR P-1NH Holdings no 09/02/93 WR WR WR WR WR WR WR WR NPNorthwestern Corporation no 09/15/03 WR WR WR WR WR WR P-2 P-2 P-2Pacific Gas & Electric Company yes 01/17/01 P-3 P-1 P-1 P-1 P-1 P-1 P-1 P-1 P-1PG&E Corporation yes 01/17/01 P-3 P-1 P-1 P-1 P-1 P-1 P-1 P-1 P-2Polaroid Corporation no 10/12/01 WR WR WR WR WR WR WR WR P-1R.H. Macy & Co., Inc. no 01/27/92 WR WR WR WR WR WR WR WR P-1Republic Steel Corporation no 07/17/86 WR WR WR WR WR WR WR WR P-2Revco D.S., Inc. no 07/28/98 WR WR WR WR WR WR WR WR P-2Rothschild Holdings (LF), Inc. no 06/30/89 WR WR WR WR WR WR WR WR P-1Smith International, Inc. no 03/07/86 NP P-3 P-3 P-3 P-3 P-3 P-3 P-2 P-2Solutia, Inc no 12/17/03 WR WR WR WR WR WR WR NP P-2Southeast Banking Corporation no 09/19/91 WR WR WR WR WR NP NP NP P-3Southern California Edison Company yes 01/16/01 P-3 P-1 P-1 P-1 P-1 P-1 P-1 P-1 P-1Southland Corporation no 10/25/90 WR WR WR WR WR WR WR WR P-2Southwest Bancshares, Inc. no 03/27/89 WR WR WR WR WR WR WR WR P-2Sunbeam Corporation no 02/20/88 WR WR WR WR WR WR WR WR P-2Swissair Group no 10/04/01 NP NP NP NP P-3 P-3 P-2 P-2 P-2Texaco Inc. no 04/07/87 WR WR WR NP NP NP NP NP P-1UNI Storebrand yes 08/25/92 NP P-3 P-2 P-2 P-2 P-2 P-2 P-2 P-2UDC Homes, Inc. no 05/15/95 WR WR WR WR WR WR WR WR P-1United Merchants and Manufacturers Inc no 07/12/77 WR WR WR WR WR WR WR WR P-2USG Corporation no 03/17/93 WR WR WR WR WR WR WR WR P-1USGen New England no 07/08/03 WR WR WR WR WR WR WR WR P-2W.R. Grace & Company - Conn. no 04/02/01 WR NP NP NP NP NP NP NP P-2Wang Credit Corporation yes 08/16/89 NP NP NP NP NP P-3 P-3 P-3 NPWang Laboratories Inc. yes 08/16/89 NP NP NP NP NP P-3 P-3 P-3 NPWashington Group International, Inc. no 06/25/96 WR WR WR WR WR WR WR WR P-2West Point-Pepperel, Inc. no 06/09/90 WR WR WR WR WR P-3 P-3 P-3 P-2Western Company of North America no 02/02/88 WR WR WR WR WR WR WR WR P-1WorldCom, Inc. no 07/21/02 NP NP NP P-2 P-2 P-2 P-2 P-2 P-2Yamaichi Securities Co., Ltd. no 06/01/99 WR WR WR WR WR WR WR WR P-2Zale Corporation no 01/24/92 WR WR WR WR WR WR WR WR P-2

Moody’s Special Comment 15

Exhibit 15 – Unrated Commercial Paper Defaults*Defaulter Default Year

Aerovias de Mexico S.A. de C.V. 1994Beijer Capital AB 1990Bensow Oy 1989C&P Homes International Ltd. 1999CODEC 1990Confederation Life Insurance Company 1994Confederation Treasury Services U.K. Ltd. 1994Constran International Limited 1996DFC New Zealand Limited 1989Drexel Burnham Lambert, Inc. 1990Eletropaulo Met. Elec. De Sao Paulo 2002Finansor AB 1990Fuerzas Electricas de Cataluna, S.A. (FECSA) 1988Gamelstaden Förvaltnings AB 1990Gota AB 1992Grupo Simec, S.A. de C.V. 1995Grupo Situr, S.A. de C.V. 1995Grupo Synkro S.A. de C.V. 1995Haningehem AB 1992IMPSA 2001Infina/Independent AB 1990Integrated Resources, Inc. 1989Intra Corporacion Financiera S.A. 1991Kapital Haus, S.A. de C.V. 1995Mancon Oy 1989Mortgage & Realty Trust 1990Nyckeln Holding AB 1990Olympia & York Developments Limited 1992Polly Peck International plc 1990PT Davomas Abadi 1998PT Polysindo Eka Perkasa 1998SFEC 1987Stockwalk.com Group, Inc. 2001Stotler Group, Inc. 1990Washington Bancorp. 1990Zanella Hermanos y Cia. 1995

* CP never rated by Moody's prior to default, although the issuer may have other Moody's-rated debt obligation

16 Moody’s Special Comment

Moody’s Special C

omm

ent17

n

P-1 P-2 P-3 NP D* WR

0.6% 0.4% 0.0% 0.0% 0.0% 0.4%

0.6% 1.4% 0.6% 0.3% 0.0% 1.2%

0.4% 2.8% 5.7% 3.6% 0.3% 3.9%

0.0% 3.2% 3.5% 10.6% 1.1% 9.5%

0.9% 0.6% 0.0% 0.1% 0.0% 0.6%

0.8% 2.6% 0.9% 0.5% 0.1% 2.4%

0.6% 3.9% 7.8% 5.0% 0.5% 5.6%

0.0% 3.9% 4.4% 15.0% 1.5% 13.4%

1.3% 0.8% 0.1% 0.1% 0.0% 0.8%

1.1% 3.6% 1.1% 0.6% 0.1% 3.5%

0.7% 4.8% 9.7% 5.9% 0.6% 6.9%

0.0% 4.5% 5.5% 17.4% 2.0% 15.2%

1.6% 1.0% 0.1% 0.1% 0.0% 1.0%

1.3% 4.6% 1.4% 0.8% 0.1% 4.4%

0.8% 5.5% 11.0% 6.6% 0.8% 8.1%

0.0% 5.0% 6.1% 19.8% 2.4% 17.4%

2.1% 1.3% 0.1% 0.1% 0.0% 1.3%

1.8% 6.2% 1.6% 1.1% 0.1% 6.1%

0.9% 7.1% 13.4% 7.4% 1.0% 10.2%

0.0% 5.7% 7.1% 22.8% 3.0% 19.2%

2.9% 1.6% 0.2% 0.2% 0.0% 1.8%

2.3% 8.0% 1.9% 1.4% 0.1% 8.0%

1.2% 9.0% 15.3% 7.9% 1.5% 11.9%

0.0% 6.2% 7.9% 25.8% 3.3% 21.4%

3.6% 1.9% 0.2% 0.2% 0.1% 2.3%

2.7% 8.9% 2.1% 1.7% 0.2% 8.8%

1.5% 10.4% 16.0% 7.5% 1.9% 12.8%

0.0% 7.2% 8.8% 26.6% 3.6% 21.7%

Exhibit 16 – Statistical Summary of Rating Transitions

Maximum Level Minimum Level Standard DeviatioHorizon

(Days) From\To P-1 P-2 P-3 NP D* WRHorizon

(Days) From\To P-1 P-2 P-3 NP D* WRHorizon(Days)b From\To

30

P-1 100.0% 2.0% 0.3% 0.5% 0.3% 3.8%

30

P-1 95.3% 0.0% 0.0% 0.0% 0.0% 0.0%

30

P-1

P-2 3.5% 100.0% 4.3% 1.9% 0.4% 9.8% P-2 0.0% 90.2% 0.0% 0.0% 0.0% 0.0% P-2

P-3 6.7% 18.2% 100.0% 39.6% 4.3% 30.8% P-3 0.0% 0.0% 60.4% 0.0% 0.0% 0.0% P-3

NP 0.0% 50.0% 50.0% 100.0% 9.4% 100.0% NP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% NP

60

P-1 100.0% 3.2% 0.5% 0.5% 0.3% 4.4%

60

P-1 93.7% 0.0% 0.0% 0.0% 0.0% 0.0%

60

P-1

P-2 5.1% 100.0% 5.0% 4.3% 0.6% 19.7% P-2 0.0% 80.3% 0.0% 0.0% 0.0% 0.0% P-2

P-3 6.7% 18.2% 100.0% 40.0% 7.1% 30.8% P-3 0.0% 0.0% 53.3% 0.0% 0.0% 0.0% P-3

NP 0.0% 50.0% 50.0% 100.0% 12.5% 100.0% NP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% NP

90

P-1 100.0% 4.2% 0.5% 0.5% 0.3% 5.7%

90

P-1 91.5% 0.0% 0.0% 0.0% 0.0% 0.0%

90

P-1

P-2 7.0% 99.2% 6.3% 4.3% 0.6% 28.5% P-2 0.0% 71.5% 0.0% 0.0% 0.0% 0.0% P-2

P-3 6.7% 25.0% 100.0% 41.5% 7.1% 33.3% P-3 0.0% 0.0% 38.5% 0.0% 0.0% 0.0% P-3

NP 0.0% 50.0% 50.0% 100.0% 15.8% 100.0% NP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% NP

120

P-1 100.0% 5.0% 0.5% 0.6% 0.3% 7.5%

120

P-1 89.9% 0.0% 0.0% 0.0% 0.0% 0.0%

120

P-1

P-2 7.5% 98.4% 7.1% 4.6% 0.6% 36.9% P-2 0.0% 63.1% 0.0% 0.0% 0.0% 0.0% P-2

P-3 6.7% 28.6% 100.0% 45.3% 7.7% 37.5% P-3 0.0% 0.0% 38.5% 0.0% 0.0% 0.0% P-3

NP 0.0% 50.0% 50.0% 100.0% 15.8% 100.0% NP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% NP

180

P-1 100.0% 6.8% 0.6% 0.6% 0.3% 10.4%

180

P-1 87.9% 0.0% 0.0% 0.0% 0.0% 0.0%

180

P-1

P-2 10.1% 96.7% 8.3% 4.6% 0.6% 50.8% P-2 0.0% 49.2% 0.0% 0.0% 0.0% 0.0% P-2

P-3 7.1% 35.7% 100.0% 43.4% 9.1% 46.7% P-3 0.0% 0.0% 33.3% 0.0% 0.0% 0.0% P-3

NP 0.0% 50.0% 50.0% 100.0% 21.4% 100.0% NP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% NP

270

P-1 98.4% 8.4% 0.6% 0.8% 0.3% 12.3%

270

P-1 83.5% 0.0% 0.0% 0.0% 0.0% 0.5%

270

P-1

P-2 12.6% 95.6% 10.4% 5.7% 0.7% 73.8% P-2 0.0% 26.2% 0.0% 0.0% 0.0% 0.6% P-2

P-3 7.7% 50.0% 100.0% 45.3% 9.7% 57.1% P-3 0.0% 0.0% 25.0% 0.0% 0.0% 0.0% P-3

NP 0.0% 50.0% 50.0% 100.0% 21.4% 100.0% NP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% NP

365

P-1 97.7% 9.3% 1.0% 0.9% 0.3% 13.9% 365 P-1 80.4% 0.0% 0.0% 0.0% 0.0% 0.9% 365 P-1

P-2 14.6% 92.8% 10.5% 6.7% 0.7% 86.2% P-2 0.0% 13.1% 0.0% 0.0% 0.0% 2.2% P-2

P-3 8.3% 53.3% 94.4% 45.3% 11.1% 63.3% P-3 0.0% 0.0% 20.0% 0.0% 0.0% 0.0% P-3

NP 0.0% 50.0% 50.0% 100.0% 21.4% 100.0% NP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% NP

* Includes issuers that held rated CP on the cohort formation date and defaulted by the end of the time horizon.

Related Research

Special Comments:Default & Recovery Rates of Corporate Bond Issuers 1920-2003, January 2004, (80989)Rating Transitions and Defaults Conditional on Watchlist, Outlook and Rating History, February 2004, (81068)Recovery Rates on Defaulted Corporate Bonds and Preferred Stocks, 1982-2003, December 2003, (80272)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of thisreport and that more recent reports may be available. All research may not be available to all clients.

18 Moody’s Special Comment

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20 Moody’s Special Comment

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