NEW YORK-The number of issuers defaulting on publicly held corporate debt more than doubled from 1996 to 1997, Moody’s Investors Service reported in a new study.
Moody’s said that 64 issuers defaulted on $8.56 billion of long-term publicly held corporate debt last year, up from 26 companies that defaulted on $5.04 billion of debt in 1996.
The number of individual defaults by industry sector shifted last year. While industrial firms remained the largest category of defaulters worldwide, technology dropped to fourth place in 1997 from second place in 1996. Non-bank financial companies ranked second and consumer products companies third in 1997.
As a fraction of the overall dollar volume of defaulted debt last year, technology companies accounted for 11 percent and media companies for 4 percent.
In-Flight Phone Corp., bogged down by the unreliability of its Flightlink air-to-ground telecommunications system, was the only wireless telephony company to default last year. Through IFP Holdings Inc., MCI Telecommunications Corp. owns about 66 percent of In-Flight, which is headquartered in Oakbrook Terrace, Ill. In-Flight, which filed for Chapter 11 bankruptcy protection in January 1997, defaulted on $285.8 million of senior discount notes due 2002.
In November, Midcom Communications Inc., a Southfield, Mich., long-distance carrier, also filed for Chapter 11 bankruptcy protection. Midcom defaulted on $97.7 million of convertible subordinated notes.
Likewise, SA Telecommunications Inc., a Richardson, Texas, regional interexchange carrier, filed for Chapter 11 protection in November. It defaulted on $27.2 million of convertible subordinated notes.
Two satellite television companies also defaulted on outstanding debt last year: Tee-Comm Electronics Inc., a Milton, Canada, carrier and dish manufacturer; and Australis Media Ltd., a Sydney carrier. Both also declared bankruptcy.
Moody’s said its 1997 default figures don’t yet reflect the full depth and breadth of credit deterioration in Asian economies because much of the outstanding debt there is sold privately and
isn’t rated. Weakening in the quality of Asia’s unrated, non-public credits has produced a wave of firm closings and bankruptcy filings throughout Asia, and this has brought some of the larger financial institutions in South Korea, Thailand, Indonesia and Japan to the brink of bankruptcy, the rating agency report said.
“As credit weakness reverberates back from the largely privately financed industrial sector to the more publicly financed financial sector, default totals will continue to rise throughout 1998,” said Sean C. Keenan, assistant vice president and author of the report.
Moody’s also concluded that 1997 figures don’t yet reflect the full impact of the wave of low-end speculative grade bond issuance flooding the U.S. market.
By year-end, speculative grade issuance had risen over 1996 levels by $20 billion, or 30 percent, reaching a record $88 billion for the year. Investment grade bond issuance rose by only $15 billion, or 12 percent, to $145 billion.
As in 1996, new speculative grade debt issuance was skewed toward the riskier end of the credit scale, with 69 percent of the new debt carrying a rating of B1 or lower. During the prior year, 71 percent of the dollar volume issued was in this lower tier rating category.
Additionally, 49 percent of the speculative grade debt sold last year was placed privately in this country under Securities and Exchange Commission Rule 144a. More than 80 percent of this privately placed debt was rated B1 or below, versus 41 percent for public issuance.
Moody’s said it upgraded last year the ratings on 205 issues affecting $303 billion in outstanding debt and downgraded 161 issues affecting $144 billion. But because of the large volume of new junk bond issuance at the lower end of the speculative grade rating scale, average credit quality deteriorated overall.
“The percentage of speculative grade issuers carrying a B or lower rating at the senior unsecured level rose to 55 percent from 52 percent, a riskier credit mix than existed immediately before the speculative grade market melt-down of the early 1990s,” Moody’s said.
If the past is prologue, then there likely will be more defaults going forward. Moody’s, whose database goes back to 1920, said its research shows that 3.27 percent of speculative grade issuers default each year on average compared with 0.17 percent of investment grade issuers.
Last year, the 12-month trailing default rate reached 1.82 percent overall, up from 1.64 percent in 1996 but well below the post-1970 average of 3.38 percent, according to Moody’s.
“A rate of 3.38 percent remains an unlikely target for 1998, barring some additional sources of instability or economic weakness,” Keenan said.
However, he said he believes current conditions could drive up the default rate to 2.5 percent for 1998, implying more than $10 billion in defaulted debt.
