Default risks rise for US spec-grade firms

04 March 2008 16:39  [Source: ICIS news]

HOUSTON (ICIS news)--The likelihood of default is growing among companies issuing speculative-grade debt as credit markets remain in turmoil, Moody's Investors Service said on Tuesday.

As such, default rates among US speculative-grade issuers will likely rise to 5.3% by the end of the year, up from 0.9% in 2007, Moody's said.

The comparison is more striking because the default rate in 2007 was at its lowest level since 1981, when it was 0.7%.

Already, tightened credit markets have affected chemical companies.

US nylon and specialty chemicals producer Solutia last month sued three lenders that backed out of an agreement to fund the company's $2bn (€1.32bn) exit-financing package.

The banks argued that tighter credit markets freed them from their obligation to fund the financing. The two sides ultimately settled, and the banks agreed to fund the package.

Credit markets started tightening in the summer as the result of rising house foreclosures in the US. The turmoil spread from the housing sector to disrupt larger parts of the financial market.

Banks have tightened lending requirements, Moody's said, while large banks and bond insurers continue to face financial challenges and the US house market remains weak.

"The overall refunding risk is high for speculative-grade bonds and bank credit facilities as volatile capital market conditions outweigh slight improvements in ratings over the last year," said Kevin Cassidy, Moody's vice president and senior credit officer.

For 2008-2010, $86bn in credit facilities and corporate bonds are scheduled to mature, according to an examination of Moody's 300 speculative-grade corporate issuers.

That amount is lower than that for 2004, 2005 and 2006, Moody's said, although the amount does exceed the 2007 figure.

($1 = €0.66)

By: Al Greenwood
+1 713 525 2653

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