Rating agency Moody’s forecasts that the economic slowdown will start to show up in markedly higher junk bond defaults. Note that, thanks to LBOs, nearly half the corporate issues outstanding are now rated junk. That means a normal cyclical deterioration in weaker credits will affect a larger proportion of corporations than in the past.
The global default rate on high-yield, high-risk bonds, which finished 2007 at a 26-year low of 0.9 percent, will jump more than fivefold by the end of 2008, according to Moody’s Investors Service.
The high-yield default rate will increase to 4.8 percent this year and reach 5 percent by the end of 2009 because a weakening economy and ratings cuts will cause more issuers to miss their interest payments, Moody’s analyst Kenneth Emery in New York said today in a statement.
“We believe December 2007 likely marks the low point of the current default rate cycle as several issuers have missed interest payments in recent weeks,” Emery said in the statement. That “should translate into upward pressure on default rates as the 30-day grace periods on these issuers’ bonds expire and they become actual defaulters,” he said….
The percentage of issuers with debt trading at distressed levels rose to 11.5 percent, the highest since July 2003, the ratings company said. A year ago, the rate was 4.2 percent.
Debt that trades at a spread of 1,000 basis points or more over similar-maturity Treasuries is considered “distressed,” indicating investor concern that default may occur. A basis point is 0.01 percentage point. High-yield companies are rated below Baa3 by Moody’s and BBB- by Standard & Poor’s.