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Defaults on corporate bonds are surging

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NEW YORK — Corporate bond defaults, on the rise so far this year, may climb to levels not seen since the U.S. recession in 1990-91 in the months ahead, according to a Moody's Investors Service research report.

A total of 37 borrowers around the world defaulted on $9.6 billion of junk-rated debt in the second quarter, up from the 23 that defaulted on $7.4 billion in the first quarter, the credit rating company said. This represents a default rate of 5.4 percent and is the second-highest number of defaults since the recession of the early 1990s.

The worst is likely not over. Indicators of future defaults such as the current ratio of credit ratings upgrades to downgrades point to a default rate of as high 8.4 percent in a year's time, said David Hamilton, a Moody's analyst. That would be the worst since the 10 percent-plus default rates of a decade ago.

"Through the end of the first quarter of 2000, downgrades have outpaced upgrades nearly three to one, which signals higher default risk well into 2001," Hamilton said. Moody's outlook on defaults has been among the most pessimistic among analysts and Wall Street firms.

Some 53, or 58 percent, of the 91 bonds on which payments were missed or delayed were issued in 1997 or 1998. In these years, companies with some of the lowest debt ratings were able to raise money in the junk bond market, reflecting investors' willingness then to take on risk.

Now, these same companies are struggling to make payments on their debt, Moody's said.

North American companies accounted for 92 percent of all second-quarter defaults, with 8 percent coming from East Asia and the Pacific. Bus, ambulance and trash-hauling company Laidlaw Inc. and GST Telecommunications Group accounted for over $3.2 billion in defaults during the period, the credit rating company said.