Fewer, Faster Junk Bond Defaults in Q3

Twenty-one companies defaulted on $4.14 billion of debt in the third quarter, compared to 36 companies defaulting on $9.94 billion in the prior quarter, according to a report by Edward Altman, the Max L. Heine Professor of Finance at New York University’s Leonard N. Stern School of Business.

The rate of defaults from January to September projects to an annualized rate of 4.55% for the year, just above 1999’s 4.15% pace, according to Reuters. Still, that is less than half the record levels of 1990 and 1991, when the rate topped 10%.

The report, issued by Salomon Smith Barney, to which Altman is a consultant, cautioned of:

• a rise in the amount of “distressed” junk bonds
• a significant decline in corporate credit quality
• several large bankruptcy filings announced this month

announcements by several companies that they may have trouble meeting interest payments

Altman also noted that defaults have been occurring sooner after a bond’s issuance, suggesting a decline in credit quality for debt issued from 1996 to 1998, when credit was more freely available than at present.

In fact, 73% of this year’s defaults are occurring within three years of a bond’s issue.  Over the past dozen years, only 1994 saw a higher rate.

The “recovery rate” for defaulted debt, based on prices just after default, is now just 28 cents on the dollar, below the historical average of 42 cents.