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S&P Expects $100 Billion In Corporate Debt Defaults

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NU Online News Service, Oct. 29, 11:46 a.m. – Standard & Poor’s, New York, is now predicting that 200 companies will default on their debt this year.

Defaults will affect roughly $100 billion in debt worldwide, up from $42 billion in 2000, S&P estimates.

S&P is expecting a default rate of 0.48% on debt securities with investment-grade credit ratings, and 9.4% on debt securities with low credit ratings.

U.S. life insurers held about $990 billion in investment-grade corporate debt in their general accounts in 1999, and about $100 in low-grade corporate debt, according to the American Council of Life Insurers, Washington.

If the S&P default rate estimates hold true for the corporate debt in life company general accounts, defaults could affect about $14 billion in life general account corporate debt holdings, according to National Underwriter calculations.

Defaults on corporate debt do not necessarily mean that the borrowers will fail to pay their lenders. In many cases, the borrowers end up paying part or even all of what they owe.

The current situation does hurt efforts by executives to turn troubled companies around, S&P says.

Because most investors with cash to lend now prefer government bonds and top-rated corporate bonds, investors that are willing to lend to borrowers with weak credit ratings can demand rates that are far higher than the rates paid by borrowers with strong credit ratings, S&P says.