The credit crunch, bankruptcies, and leftover debt from the leveraged-to-the-hilt 1980s will lift the corporate bond default rate to a 20-year high this year, Moody's Investors Service predicts.
"The leveraging of the '80s is obviously significant," said Jerome Fons, a Moody's economist. "Thirty-four of the companies that defaulted had done [leveraged buyouts] in the last couple of years."
As for the credit crunch, high-yield companies look to banks as one of their comparatively few alternative financing sources. Banks, as has been widely reported, have been "stingy" these days and uninterested in taking on high-yield debt, Mr. Fons said.
Early figures show speculative-grade company default rates will probably end the year at 10.3%, well above 1990's 8.8% rate. But Moody's expects defaults to drop below 1990 levels in 1992.
The agency predicts an 8% default rate in 1992, based on its current rating distribution within the speculative grades and a consensus forecast for moderate economic growth.
However, a sharp economic turn-around next year could bring the level to 7.5%, according to the Moody's model, while a deepening recession could push it closer to 9%. That would still be lower than the rate expected 1991.
Corporate de-leveraging and a speculative grade market trend toward the lower-risk Ba rating categories will fuel the declining default rate, Mr. Fons said.
The 250 companies that defaulted on about $56 billion of junk bonds during 1989-91 period left a generally hardier population behind, he added. Also, in 1991 Moody's upgraded 23 companies, including RJR Nabisco, to investment grade. That lifted another $28 billion from the speculative ranks.
To date this year, 91 companies have defaulted on $20.4 billion of bonds, down slightly from the 96 companies that defaulted on $22 billion of debt in all of 1990.
While less actual defaults occurred this year, the smaller speculative-grade universe makes the default rate higher, he said.
As for yesterday's secondary market activity, the high-yield market finished unchanged in light trading, traders said. R.H. Macy & Co. bonds fluctuated greatly but finished unchanged.
"Macy's are one of the most volatile bonds on God's green earth," one trader said. "You've got to wear a seatbelt to trade those bonds." The high-grade market was quiet, ending up about an 1/8 point overall.
As for new yesterday's new issues, Republic National Bank's $1.5 billion offering powered a surge that sent corporates well past the $2 billion mark yesterday. It appears to be the 10th time this year that new issues have either hit or surpassed that level.
Republic issued $1.5 billion of 4.5% bank notes due 1992. The noncallable notes were priced at 99.971 to yield 4.53%. Moody's rates the offering Aa1, while Standard & Poor's Corp. rates it AA. Merrill Lynch & Co. sole managed the transaction.
Exxon Capital issued $250 million of 7.450% guaranteed notes at par. The noncallable notes were priced at par to yield 30 basis points over comparable Treasuries. Both agencies rate the offering triple-A. UBS Securities Inc. managed the offering.
Shell Oil Co. issued $250 million of 6.950% notes due 1998. The noncallable notes were priced at 99.831 to yield 6.98%, or 28 basis points over seven-year Tresuries. Both agencies assign triple-A ratings. UBS Securities Inc. sole managed the offering.
In the high-yield market, Magma Copper issued $200 million of 12% senior subordinated notes at par. Due 2001, the notes are callable after five years at 106. Moody's rates the offering Ba3, while Standard & Poor's rates it BB-minus. Goldman, Sachs & Co. lead managed the offering.
U.S. Can Co. issued $100 million of 13.5% senior subordinated notes due 2002. Noncallable for five years, the notes were priced at par. Salomon Brothers sole managed the transaction.
Standard & Poor's has placed Trinova Corp.'s A-minus senior debt, BBB-plus subordinated debt, and A-2 commercial paper ratings on CreditWatch for a possible downgrade. The agency's action follows Trinova's announcement that it will incur special charges totaling $156 million in the fourth quarter. The action affects about $300 million of long-term debt.
"As a result, the firm's equity base will be significantly reduced and its financial profile will be weakend," Standard & Poor's said.
