Advertisement

Analysts See Record Year for Junk Bond Defaults : Securities: So far this year, the total is more than $3 billion, compared to $5.4 billion for all of last year.

Share via
From Reuters

Junk bonds--whose sales declined sharply in a battered market last year--could face even deeper woes this year as a record number of the high-risk, high-yield securities go into default, some analysts say.

Already this year, junk bond defaults have totaled more than $3 billion, compared to $5.4 billion for all of last year. The amount of defaults this year is more than nine times the $350 million in newly issued junk bonds.

“It is very likely that we will see a record year” for junk bond defaults, said Cynthia Latta, senior economist at Data Resources Inc.

Advertisement

The $200-billion junk bond market has deteriorated in recent months as investors have shied away from the risky securities.

Last month, the brokerage Drexel Burnham Lambert, which virtually created the market in the late 1970s, collapsed. Its parent company filed for bankruptcy protection and began liquidating, creating a void in the industry.

Drexel pleaded guilty to securities charges in 1988 and agreed to pay $650 million in fines, while Michael Milken, former head of the brokerage’s junk bond division, faces a raft of charges.

Advertisement

“Further declines in credit quality among high-yield issuers are expected, as are more defaults and exchanges,” said Thomas Razukas, senior vice president at Fitch Investors Service Inc. Cash flow forecasts of some issuers were overly optimistic, he said in a report.

Junk bonds are rated as below investment grade, but Milken was able to create a huge market for the securities by convincing investors that their high yields offset the occasional failure of an issuer.

Corporate raiders found junk bonds an ideal way to raise money but then depended on asset sales to pay down their debt quickly. Poor cash flow and a lack of bidders for assets have imperiled heavily leveraged companies such as Canada’s Campeau Corp., the owner of the Federated and Allied department store units.

Advertisement

With the prospect for slower economic growth in the short term, many companies that issued junk bonds in the mid-1980s will face tough times ahead, Latta said.

Nevertheless, some brokers still believe that junk bonds can be a smart investment for certain clients.

Advertisement