Bond Outlook Upbeat Despite New Junk Ratings

The ranks of corporate bonds rated “junk” continued to grow Monday, but a leading credit-rating agency said it is sticking by its prediction that actual bond defaults by companies will decline this year.

Moody’s Investors Service downgraded the bonds of two Las Vegas-based gambling giants--Park Place Entertainment Corp. and MGM Mirage Inc.--to junk status, or below investment grade.

Moody’s said the downgrade to Ba1 for both firms reflected expectations that the Sept. 11 terrorist attacks probably will keep many gamblers away from casinos “for some period of time.”

Also Monday, Moody’s said it cut retailer Gap Inc.’s debt rating to the lowest investment-grade level, and warned it may be reduced to junk status because of the chain’s weak sales picture.

But Moody’s issued a more upbeat report on corporate bonds overall: The ratings agency said that bond defaults by companies more than doubled last year to record levels. But it said the junk-bond default rate should fall to 7.2% of outstanding bonds this year from 10.2% last year.

Moody’s, Standard & Poor’s and other rating agencies downgrade bond ratings when they believe a company may have a tougher time paying its bills. However, a downgrade, even to junk status, doesn’t mean a default is likely. Indeed, most companies whose bonds are listed as junk continue to make their interest payments.

Still, a ratings downgrade can worsen a company’s financial situation because investors typically demand that lower-rated firms pay more to borrow, to compensate for higher risk.

Moody’s said 253 companies worldwide, including Enron Corp., Finova Capital Corp. and PG&E; Corp.’s main utility unit, defaulted on $110.2 billion of bonds last year, compared with 167 companies defaulting on $49.2 billion in 2000.

In downgrading Park Place and MGM Mirage on Monday, Moody’s pointed to concern that Las Vegas and other gambling centers won’t see a fast recovery in 2002.

Gambling revenue in Nevada fell 7.5% in November from a year ago, according to a state report released Friday, because fewer high-rollers visited Las Vegas to play baccarat, a game favored by those who wager large sums of money.

“The international high-roller has been in hibernation,” said ABN Amro analyst Joseph Greff. MGM Mirage owns such properties as Bellagio and the MGM Grand; Park Place owns Bally’s and Caesars Palace, among others.

Park Place shares fell 24 cents to $9.50 and MGM Mirage dropped 94 cents to $28.85, both on the New York Stock Exchange. That was before Moody’s made its announcement, which came after the close of trading.

As for Gap, Moody’s said the struggling chain may need to scale back 2002 expansion plans to protect its finances.

Gap shares were off 23 cents to $15.55 on the NYSE before Moody’s announcement.