Defaults on High Yield Bonds Set to Reach New Highs
Default rates on high-yield or "junk" bonds are likely to hit 4.64% this year, and 5% in 2009, predicts New York University professor Edward Altman. Jeffrey McCracken reported yesterday in the Wall Street Journal that in his latest report, Altman warned that default rates on high yield bonds were heading for historic highs:
Altman, whose so-called Altman-Z score is the market standard for predicting bankruptcy, sees as much as $53 billion in high-yield debt defaulting in 2008, up from $5.5 billion in 2007. Altman's study takes into account a company's original credit rating when it received its financing, historic default rates, the size of debts outstanding, and other factors.
New high-yield issues totaled a near-record of $141 billion in 2007, but almost $100 billion of that was in the first six months of the year before the credit market slowdown took fuller hold. 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.
McCracken notes that Altman did not take into account unemployment rate, GDP growth or any other assumptions about the economy:
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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