In another sign corporate borrowers are having trouble meeting their debt obligations, a study by Standard & Poor's shows defaults nearly tripled in 1998 from a year earlier.
The results, published last week in S&P's CreditWeek, showed 48 issuers with more than $10 billion of debt failing to make timely payments in 1998. That compared with 17 issuers in 1997 with $4.35 billion of debt, S&P said.
In the study, S&P reviewed 7,328 long-term bonds and bank loans. S&P has rated bank loans since 1995.
Leo Brand, an analyst and co-author of the study, said the results suggested that not only new issuers' but also previous issuers' credit quality is deteriorating.
"It's obvious the market is becoming more tolerant of lower-rated credit," Mr. Brand said. "Credit quality is in bad shape."
Though the number of defaults rose sharply, Mr. Brand was quick to point out that they equaled just 1.17% of all debt outstanding, slightly more than the 1.14% average for 1981 to 1998.
Still, the rate of default was the highest since a 1.44% rate in 1992, the last year of widespread defaults in both the bank loan and junk bond markets.
Mr. Brand said that in recent years investors and banks have forgotten the trouble encountered in the early 1990s when many defaults and writeoffs threatened some big banks and brokerages.
In recent years, the big returns on below-investment-grade loans and bond issues have attracted investors and underwriters. Last year 586 bond issues and bank loans, 60% of rated debt, were below investment grade- almost the opposite of the "credit crunch" year of 1994 when investment- grade issues outnumbered leveraged ones by 329 to 182, or nearly 2 to 1.
"The market began to develop an appetite for risk," Mr. Brand said. "Memories are short. The economy has been doing well, so the market tends to forget."
The S&P report came on the heels of two similar studies that suggested defaults are on the rise.
A report in January by BankAmerica Corp. showed borrowers were more likely to have defaulted on their loan agreements in the fourth quarter of 1998. And a survey by Phoenix Management Services Inc. in December found, among other things, that most lenders predicted defaults would rise in 1999.
