S&P says now more than 1 US corporate default per day
By Jonathan Stempel
NEW YORK, Jan 22 (Reuters) - Call it a case of the thrill
of victory and the agony of default.
Corporate bonds have surged in January, and junk bonds have
already risen more than 5 percent, yet their rally is masking
something ominous: more than one U.S. company a day is going
into default.
Credit rating agency Standard & Poor's said 15 companies it
rates have defaulted on $7.5 billion of debt this year, in just
13 business days.
U.S. companies are now well on their way to shattering
records they set last year, when 108 defaulted on $34.3
billion, S&P said.
"Given pervasive quality issues, we expect defaults to
continue to surge," said Diane Vazza, S&P's head of global
fixed-income research. "We're on pace certainly to rival, if
not exceed, those numbers, and it looks like more of the
fallout will be in the first part of the year."
U.S. companies' credit quality has plunged because of the
slowing U.S. economy, tighter lending standards, rising debt
loads, merger activity, surging costs, and a strong U.S.
dollar, among other reasons. S&P said it has downgraded more
companies than it has upgraded for 10 straight quarters.
Moreover, many companies that took on debt in the late
1990s, when credit was easy to obtain, are now finding it hard
to make payments or refinance. Defaults historically peak two
to three years after junk bond issuance peaks, and that
issuance totaled $373 billion between 1997 and 1999, S&P said.
This year, it's not just the tiny start-up companies with
grand visions and no profits that are defaulting -- though S&P
expects many of them to have trouble this year. Household names
are biting the dust, too.
Last week, California's crisis-ridden utilities Pacific Gas
and Electric Co. and Southern California Edison
missed several payments, while Cincinnati-based banana producer
Chiquita Brands International Inc. said it will stop
making payments on $862 million of debt.
Earlier in the month, meanwhile, St. Louis-based Trans
World Airlines Inc. filed for bankruptcy protection,
and Cherry Hill, N.J.-based pickle maker Vlasic Foods
International Inc. missed an interest payment.
Another agency, Moody's Investors Service, expects the
global junk bond default rate to jump to 9.1 percent, a 10-year
high, from 6.01 percent at the end of 2000. As many as 450 U.S.
and Canadian companies will succumb in 2001, it said, after a
year when the U.S. junk bond default rate was 7 percent.
MARKETS IGNORE THE PAIN
Yet, so far this year, corporate bond markets are ignoring
the carnage. They got a shot from the Federal Reserve's
surprise 0.50 percentage point cut in its target federal funds
rate on Jan. 3, and have enjoyed big net cash inflows.
Investment-grade corporate bonds have returned 1.33
percent, including interest, according to Merrill Lynch & Co.
Junk bonds, which carry higher yields because of their risks,
have returned 5.05 percent, Merrill Lynch said. In contrast,
super-safe Treasuries have returned just 0.377 percent.
At the same time, the yield gap, or spread, between the
bonds and Treasuries has shrunk 0.14 and 0.88 percentage points
for investment-grade and junk bonds to a still historically
high 1.89 and 7.9 percentage points, Merrill Lynch said.
S&P's own indexes show those yield gaps shrinking 0.25 and
1.04 percentage points to 2.28 and 9.45 percentage points.
Meanwhile, corporate bond issuance is surging, according to
Thomson Financial Securities Data of Newark, N.J.
Investment-grade issuance, including from government
agencies, surged 27.1 percent from a year ago to $57.9 billion,
it said. Junk bond issuance has more than doubled from a year
ago to $8.3 billion, and has doubled from the entire fourth
quarter of 2000, when just $4.16 billion was sold.
"I don't think the market has totally discounted credit
quality problems or defaults," Vazza said. "The Fed's cutting
rates is lending a window to issuers coming to market, but the
market could be spooked by defaults, and spreads could widen."
859-1662,
jon.stempel@reuters.com ))
REUTERS
Rtr 14:27 01-22-01 |
