Junk bond defaults have soared during the last four months.
Companies failed to make payments on about $4.4 billion of junk bonds in the first quarter-roughly double the fourth-quarter default rate-according to a Salomon Smith Barney report prepared by Edward Altman, a New York University professor.
And defaults have continued to pile up in April.
At these levels, high-yield defaults may surpass the average annual rate for the first time since the recession of the early 1990s, market observers say.
"And this is all in a benign credit cycle, with a booming economy, a booming stock market, and low interest rates," said Mr. Altman, a finance professor at the university's Stern School of Business.
Defaults are on track to exceed most projections made at the start of the year.
Estimates based on the first quarter-when 23 companies defaulted on 33 junk bonds-indicate the 1999 default rate may reach 3.5%. This would be higher than Mr. Altman's projections just two months ago, when he said the annual default rate might return to something like the 3.1% historical average.
"This is the first time in several years that the default rate has actually risen higher than my projections," Mr. Altman said.
The energy sector dominated defaults this month, with at least four large defaults last week.
Last Tuesday, TransAmerican Energy Corp. failed to meet payments on two junk bonds, worth a total of nearly $1.5 billion. The Houston-based energy company defaulted on $475 million of senior secured notes and $1 billion of discount notes, according to Moody's Investors Services Inc.
Other defaults in the last two weeks included a $116 million junk bond for Trans Texas Gas Corp. and a $105 million bond for FWT Corp., a Fort Worth energy company.
Though these defaults would seem to justify longtime fears among high- yield investors about the energy sector, analysts say it is tough to draw conclusions about any sector based on one month's results.
Last week Gulf States Steel Corp. missed a payment on a $190 million junk bond. Though the Alabama steel manufacturer is still within the 30-day grace period before it technically defaults, company officials have said they do not expect to make the payment in the allotted time.
Mr. Altman says the annual average default rate has been around 3% for the last 30 years. But since 1993, it has hovered around 1% to 2%.
The sudden increase in high-yield defaults is widely blamed on a spate of new issuance from mid-1997 to mid-1998 that included a large number of lower-rated issues.
Many of the companies that have gone into default in the last four months brought their bonds to market within that time period. "I don't want to sound like a doom and gloomer. Investors are being compensated at a good rate for the additional risk," Mr. Altman said.
Companies issuing new debt on the high-yield market have had to pay a premium ever since the junk bond market took a dive in late summer in response to Russia's financial crisis.