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Corporate Debt Suggests Defaults Are Likely
Business Week
The Associated Press
January 24, 2008

The volume of U.S. corporate debt issued by companies in severe financial distress rose in January to the highest level in more than four years, suggesting corporate defaults are likely to surge in coming months, Standard & Poor's said Thursday.

The credit-rating agency said the ratio of "distressed" corporate debt to all speculative-grade debt jumped to 11.1 percent in January from 6.1 percent in December. The percentage this month is the highest since September 2003.

The surge occurred despite aggressive moves by the Federal Reserve to ease the credit crunch, which former Federal Reserve Chairman Alan Greenspan has described as the worst in a decade.

A company's debt is considered distressed when its yield is greater than 10 percentage points above the 10-year Treasury note, or about 13.6 percent as of Thursday. The distressed ratio measures the number of distressed securities against the total number of speculative, or junk, securities.

S&P said the rising distress ratio, which has been climbing since bottoming out last spring, signals an increased need among companies for capital and could be a precursor to more defaults.

Defaults remained at an all-time low at the end of December, thanks in part to companies' limited funding needs. But S&P is projecting default rates to tick up to 3.4 percent within the next year.

This month has seen several major bankruptcy filings, including those of Quebecor World Inc., which listed more than $7 billion in liabilities; and Buffets Inc., which listed more than $1 billion in debt. S&P has said the number of companies at risk of default also has expanded.

"There remains a material risk that default could be significantly more pronounced and severe beyond the one-year forecast horizon," S&P said.

Companies are seeing more of their debt tumble into distressed ranks because the credit crunch has buyers of the debt demanding higher yields. Diane Vazza, an S&P managing director, said the threat of a recession and market volatility are also factors driving the increase.

As of Jan. 15, distressed debt totaled $64.5 billion, almost $30 billion more than in December. S&P said 13 of the 25 industries it monitors had double-digit distress ratios. The industries with ratios 20 percent or higher were brokerage, retail/restaurants, consumer products and homebuilders.

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