Corporate defaults to surge, Moody’s says

What began as a subprime mortgage problem earlier this year has spread across other credit markets. Investors are still willing to lend money to financially stronger companies, but demand for new debt issued by less creditworthy firms has been “largely wiped out,” Moody’s said in a report. Few companies have struggled to repay debt in recent years, mainly because booming credit markets allowed weak businesses to get rescue financing to avoid bankruptcy. However, this summer’s credit crunch has changed all that, Moody’s said. “Going forward ... many more weak companies will be unable to obtain new financing and will default either when debt maturities come due or when they run out of cash,” the agency said. The default rate among US speculative-grade companies will more than double to 4% during the next year, Moody’s predicted.

Homebuilders, auto makers, retailers and consumer durable companies may be most affected, Moody’s said. Many companies in these industries have been acquired in leveraged buyouts in recent years and have borrowed a lot of money in the process, the agency said. “The bumper crop of highly leveraged new issuance in 2006 and 2007 expanded the number of these low-rated, highly leveraged issuers to a record level,” Moody’s said. “We expect defaults to rise substantially among the large population of companies that have been aggressively financed with less than two times EBITDA/interest coverage and little or no free cash flow.” (marketwatch.com)