More than four in every 100 debt-laden companies worldwide will default on their repayment obligations in a year's time, according to a startling report released today by Moody's Investors Service, the credit rating agency.

Moody's predicted that its global default rate, currently at a 26-year low, would surge more than fourfold over the next 12 months as conditions in the credit markets deteriorate rapidly and the American economy threatens to go into recession.

If the world's biggest economy does hit the buffers, Moody's estimates that default rates could rocket to almost 10 per cent.

Kenneth Emery, director of corporate default research at Moody's in New York, said: "Currently low default rates reflect the easy credit conditions of the past couple of years, which allowed most issuers to refinance on favourable terms."

Mr Emery said a strong economic backdrop made it relatively easy to keep up with interest repayments. He said the agency was currently forecasting a slowdown but no recession in the US.

But he added: "If a recession were to materialise, default rates could increase to near double-digit levels."

Moody's internal models forecast that just 1.2 per cent of companies worldwide will have defaulted by the end of this year, but predicts that this will rise over the next year to 4.2 per cent. By November 2009, the global default rate will reach 4.7 per cent, according to its calculations. Moody's reckons defaults by US companies will also jump to 4.7 per cent from the current 1 per cent.

The agency has ratcheted up its default forecast from 3.6 per cent last month.

In Europe, Moody's is predicting that, by this time next year, some 3 per cent of companies will not have sufficient funds to meet interest repayments. Companies will either default or ask creditors for special terms, Moody's said.

Four years of cheap borrowing and easy refinancing terms have pushed corporate default rates to record lows not seen since the end of 1981.

According to Moody's just one of the companies it rates missed an interest payment date last month. The agency said American Color Graphics, a Tennessee-based printer and publisher, successfully asked creditors if it could defer an interest payment on its $280 million of secured debt.

American Color is being charged an interest rate of 10 per cent on its borrowings, payable twice a year.

For the year to date, 17 Moody's-rated borrowers have defaulted on their obligations, a little over half the 29 of the previous year, Moody's said.

Andrea Zazzarelli, associate director of corporate default research at Moody's in London, said the glut of lending to European companies, and their moves to strengthen their balance sheets in recent years, meant they "should generally have enough room for manoeuvre to absorb the near-term challenges".

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