the visible hand

it is the theory which decides what can be observed – einstein

rising junk bond defaults….

Posted by ecoshift on February 6, 2008

A Year of Reckoning –
February 6, 2008; Page C1

The credit markets have for years proved a financial sanctuary to struggling companies in distressed industries like retailing, trucking and home building. But the easy money has gotten much harder to find.

The likely result, says the New York University professor who wrote the book on corporate bankruptcies, is a big jump in companies unable to pay their borrowing costs, which often can lead to job cuts and shuttered plants and offices.

In a closely watched report to be released today, finance professor Edward Altman projects that high-yield, or “junk,” bonds will default by a rate of 4.64% this year. That would be the highest rate since 2003 and a nine-fold increase from the 0.51% rate in 2007, which was the lowest rate since 1981. High-yield debt is typically used by lower credit-quality companies to fund operations and acquisitions.

In a recent Federal Reserve survey of senior bank-loan officers, one-third of U.S. banks and two-thirds of foreign banks said they had tightened lending on commercial and industrial loans. Half the banks said they widened the spread between their cost of funds and what they charge corporate borrowers.

Besides the tight credit market, bond defaults could also be driven up by the large amount of high-yield debt coming due. As companies look to roll over this debt, they will either have to pay higher interest rates or will be shut out entirely by lenders. Mr. Altman estimates about $160 billion in leveraged loans and about $30 billion in high-yield bonds will come due this year, a similar amount in 2009, followed by even more between 2010 and 2013.

Various rating firms like Standard & Poor’s Rating Service, Moody’s Investor Services and Fitch Ratings have also predicted far higher defaults rates for 2008. Moody’s, for example, predicted a jump to about 4.8%.

Mr. Altman’s analysis doesn’t take into account unemployment rate, gross domestic product growth or any other assumptions about the economy. Mr. Altman said “if there is a significant recession in 2008, then my default forecast and those of others will be too low.”


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