Downgrades of Junk-Rated Companies Piling Up

Junk bonds got more junky in the third quarter and there’s more pain ahead, a leading credit-rating agency said Thursday.

Moody’s Investors Service in New York said it downgraded five times as many junk-rated companies as it upgraded in the quarter. Downgrades also topped upgrades of higher-rated companies.

The weakened economy means more companies are having trouble paying their debts or may soon have trouble doing so--hence the Moody’s downgrades. However, a downgrade doesn’t necessarily mean a company will default.

Moody’s cut its quality ratings on 93 junk-rated companies (those rated “Ba1” or lower) in the quarter, while upgrading 19.

Among investment-grade companies, 32 firms were downgraded while 24 were upgraded.

The third quarter was the 14th in a row in which corporate debt downgrades outpaced upgrades, Moody’s said. The record is 19 quarters, set in 1988-93.

In the aftermath of the Sept. 11 attacks, more economic weakness--and credit downgrades--are likely, Moody’s said. The airline sector has been hard hit: All major U.S. airlines other than Southwest Airlines now carry junk ratings on their unsecured debt.

A total of 48 companies defaulted on $21.9 billion of bond debt in the quarter. Year to date, 185 issuers have defaulted on a record $76 billion of debt. Last year’s bond defaults totaled $49 billion.

Fear of default has depressed prices of junk bonds, creating hefty losses for investors in junk bond mutual funds. Year to date through the third quarter, the average junk bond fund posted a total return of -4.1%, according to Morningstar.