US junk-bond defaults may quadruple

From The TimesAugust 4, 2008

Tom Bawden: New York
Defaults on American corporate junk bonds could more than quadruple in the next year as the declining economy in the United States severely restricts companies' ability to repay their debts, the Standard & Poor's ratings agency has said.

The rate of default on America's risky junk, or high-yield, corporate bonds jumped from a 25-year low of 0.97 per cent in December to 1.92 per cent at the end of June.

However, S&P said that it expected the figure to rise to 4.9 per cent by mid- 2009 and conceded that defaults could rise as high as 8.5 per cent.

By contrast, there have been no defaults on European corporate bonds in the past year, according to S&P's new report.

A default on the debt usually leads to bankruptcy and means that bondholders lose some or all of the money they are owed. Diane Vazza, head of global fixed-income research for S&P, said: “Things are going to get much worse yet. The situation in Europe will follow the US.”

The increase in US corporate bond defaults has been accompanied by a rise in the number of household names whose bonds are slipping from relatively safe investment-grade status to junk. In the past 18 months, these have included BAA, the airports operator, and Emap, the media group.

Meanwhile, other companies that may have already been junk-rated have fallen farther down the ladder. General Motors, Ford and Chrysler have each had their credit ratings lowered a notch by S&P, to B-, putting them six steps below investment grade.

S&P says that 118 corporate bonds, with a combined value of $110.5 billion, face default. This compares with 78 at the end of 2007 and 64 a year ago.