Junk Bonds Living Up to Their Name

September 24, 2002 (PLANSPONSOR.com) - Moody's Investors Service said junk bond defaults set a record in 2002 with the default rate even worse than earlier predicted.

Moody’s said $139.5 billion worth of bonds have defaulted this year, compared with a record $135 billion for all of 2001, Reuters reported.

It also said the 12-month default rate, now 9.6%, will end this year near 9.8%. Moody’s last month forecast the rate would end the year at 8.8%. In January it forecast a 6.8% year-end rate.

Moody’s said the 12-month default rate was off from 10.1% in July, the biggest one-month decline since July 2000. The rate recently peaked at 10.7% in January, its highest level since reaching 13.1% in the summer of 1991.

Many junk-rated companies defaulted this year after finding it impossible or prohibitively costly to sell or refinance debt, as investors were skeptical about corporate honesty and the longer-term strength of the US economy, Reuters reported.

Junk, or high-yield, bonds are rated “Ba1” or lower by Moody’s and “BB-plus” or lower by Standard & Poor’s Ratings Services and Fitch Ratings because of their credit risks.

Moody’s said the year’s largest junk bond default came from bankrupt phone company WorldCom Inc. with $23.2 billion of bonds.

The US junk bond default rate, which closely correlates to the global rate, fell to 9.4% in August from 10% in July.  Moody’s said seven issuers defaulted on $10.2 billion of the bonds in August, including insurance and loan company Conseco Inc. with $5.1 billion, and British telecommunications equipment maker Marconi Plc with $3.3 billion.