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To: pater tenebrarum who wrote (2875)	7/10/2000 12:54:00 PM
From: Les H	Read Replies (1) \| Respond to of 436258

July 10, 2000 Junk-Bond Defaults Are Up Sharply, Raising Concerns of a Credit Crunch By PAUL M. SHERER Staff Reporter of THE WALL STREET JOURNAL Even some of the optimists on the outlook for junk-bond defaults are saying: Never mind. Donaldson, Lufkin & Jenrette Inc., the biggest underwriter of junk or "high-yield" bonds -- which until recently was preaching a don't-worry gospel on defaults -- now isn't so sanguine. It says the U.S. is in a credit crunch, which means companies unable to raise funds from increasingly cautious lenders are being forced into default. "We see a systematic crowding out of more risky assets, [and] smaller issuers [aren't] able to access the capital markets," says Sam DeRosa-Farag, DLJ's director of global high-yield portfolio strategy. "That is the classical credit crunch." Only $8 billion in junk bonds were issued in the second quarter, down from $31.4 billion in the same period of 1999. Put another way, more junk-bonds defaulted in the second quarter than were issued. About $9.4 billion in bonds defaulted in the quarter, issued by companies ranging from cinema operator United Artists Theatre Co. to waste-management company Safety-Kleen Corp., along with several companies that were originally investment-grade issuers, such as bus operator Laidlaw Inc. Prominent junk-bond researcher Edward I. Altman at New York University's Stern School of Business, who at the start of the year had expected 3% of junk bonds to default in 2000, now expects several more quarters of high defaults after the first half ended with an annualized 5.22% default rate. More Trouble Predicted "It appears that the recent spike in default rates has some time to go before the excesses of new-issue, low-quality debt in the mid and late 1990s will be flushed out of the system," says a new report by Prof. Altman. "We can probably anticipate at least several quarters more of continued high default levels." The report was published by Citigroup Inc.'s Salomon Smith Barney, where he serves as a consultant. The growing pessimism on defaults comes as the U.S. shows signs of approaching the end of a credit bubble. After years of soaring corporate and consumer debt, a series of interest-rate increases and growing caution on the part of lenders have begun to squeeze shaky borrowers. Meanwhile, some key indicators of future defaults have turned downward. Mr. DeRosa-Farag notes that the ratio of credit-rating upgrades to downgrades has dropped sharply, from a historical average of 1.2 upgrades per downgrade to 0.65 last year and 0.4 last month. "The trend is alarming us," he says. In another bearish sign, about 17% of junk bonds are trading at distressed prices, compared with 9% at the end of 1999 and 3% at the end of 1998, says Prof. Altman. He defines "distressed" as those bonds trading at yields of 10 percentage points or more higher than Treasury issues. "A 17% distressed debt proportion is somewhat ominous, since this category makes up the vast majority of 'raw material' for future defaults," his report says. An important driver of the default surge is the recent tightening of credit standards by banks that have become less willing to continue supporting weak companies. "They're being much tougher with the marginal client," Prof. Altman says in an interview. "As a result, these companies can't refinance, they can't get waivers. They wouldn't have failed a year ago, but now they are." Caution in Bond Market Bond-market investors have become more cautious, too. While in 1996 and 1997 they were willing to lend companies up to six or more times their cash flow, "today if you have more than five times [debt to cash flow], you'd have difficulty accessing the market," Mr. DeRosa-Farag says. Though this means that today's issuers should have lower future default rates, the new caution is troublesome for companies that raised money in the mid-1990s. "Credit quality [of new issuers] has been improving so dramatically that riskier issuers who were able to access the market three or four years ago can't access the market today without significant improvement in credit statistics," says Mr. DeRosa-Farag. "All of the sudden, you're considered too risky to finance. In effect, you're shut out of the market." Whether the U.S. is in a credit crunch depends on your point of view. "When a lot of these deals came to market there was easy access to capital, probably because people's appetite for risk was higher," says David T. Hamilton, an analyst at Moody's Investors Service. "Bank lending standards have come back to earth, but I don't necessarily think they are overly tight."