Corporate Defaults Smash Records By Jonathan Stempel
NEW YORK (Reuters) - Bond defaults by companies more than doubled last year to record levels, and default rates surged to 10-year highs, but issuers and bond investors can expect better times ahead, analysts said on Monday.
Moody's Investors Service said 253 companies worldwide, including Enron Corp. (NYSE:ENE - news), Finova Capital Corp. (NYSE:FNV - news), and two big California utilities, defaulted on $110.2 billion of bonds last year, compared with 167 companies defaulting on a record $49.2 billion in 2000.
Standard & Poor's said 211 companies worldwide defaulted on $115.4 billion of bonds last year, compared with 132 companies defaulting on a record $42.3 billion in 2000.
Rating agencies, however, expect default rates to peak soon, and then fall as the U.S. economy regains steam. Moody's expects the ``junk bond'' default rate, which it said was 10.2 percent last year, to fall to 7.2 percent this year.
``The market has purged itself of some of the excesses of the recent past, particularly the 1997 and 1998 vintage deals that reflected a real and unwarranted period of exuberance,'' said Michael Goldstein, who helps run the $4.4 billion Lord Abbett Bond Debenture Fund.
Moody's said last year's default rate fell just short of a post-Great Depression calendar-year high of 10.5 percent set in 1991, when the U.S. economy was last in recession.
S&P put last year's default rate at 8.57 percent, below the record 10.86 percent set in 1991.
U.S. issuers led last year's default parade. Moody's said 182 defaulted on $86.3 billion of debt last year, pushing the U.S. default rate to 11 percent, tying the calendar-year record set in 1991. S&P said 162 U.S. issuers defaulted last year.
Moody's expects the default rate to peak near 10.5 percent by March, while S&P expects an 11 percent peak around June.
GLUT OF JUNK
The agencies said the junk bond market, which J.P. Morgan Chase & Co. said totals $782 billion, has excised much of what Moody's called a ``glut'' of debt issued by weak companies in the easy-money era of the late 1990s. Many companies later found it too costly to raise new cash or refinance debt.
``The lowest-rated credits, that were most at risk of defaulting, have mostly defaulted,'' said David Hamilton, Moody's director of default research, in an interview. ``We're left with a stronger pool of credits. This may prove cause for investor optimism at a broader macroeconomic level.''
Moody's said the average rating for new bond issuers has risen three notches to ``Baa2,'' an investment grade, last year, from ``Ba2,'' a junk grade, in 1997. Moody's rates junk bonds ''Ba1'' or lower, while S&P rates them ``BB-plus'' or lower.
Among the biggest U.S. defaults were those of energy trader Enron, financial services company Finova, PG&E Corp. (NYSE:PCG - news) unit Pacific Gas & Electric Co. and Edison International (NYSE:EIX - news) unit Southern California Edison. Enron, Finova and Pacific Gas all sought bankruptcy protection in 2001.
TELECOMS
Many upstart telecommunications companies such as PSINet Inc. and Winstar Communications Inc. also stopped paying bondholders.
This hit investors hard -- junk bonds returned 12.5 percent last year apart from telecoms, while telecom junk bonds fell 26.7 percent, Deutsche Banc Alex. Brown data show.
``It's tough to look at the events of the last couple of years'' as an investor, said Walter McGuire, Deutsche Banc's head of global high yield strategy, who expects a 5 percent junk bond default rate this year.
He said that ``the trend has certainly moved the other way'' and that an ``Enron-type of surprise'' in 2002 is highly unlikely.
Many analysts expect junk bonds to post low double-digit total returns this year, after four years of near-zero returns. So far in 2002, junk bonds are up 1.7 percent, beating all other U.S. taxable fixed income, Merrill Lynch & Co. said.
``About 25 percent of the high-yield market is already trading at 'distressed' levels,'' said Goldstein. ``Even if more companies were to default in the months ahead, it's not likely to have an outsized impact on investors' returns.
Analysts expect more pain, though, even if the U.S. economy recovers this quarter or next, as many economists expect.
``In a typical cycle, defaults peak six months after an economic bottom,'' said Diane Vazza, S&P's head of global fixed income research, in a statement. She said defaults should be more ``broad-based'' this year, with ``some concentrated weakness in certain areas of consumer products and retail.''
Hamilton, who expects particular weakness in airlines and telecommunications, said ``it won't be until 2003 that default rates fall to historical averages of around 3.5 percent.''