Junk bond default rate likely to triple

Bond defaults by companies with speculative-grade, or junk, credit ratings are likely to triple over the next year, Moody’s Investors Service said Tuesday.

The default rate is expected to climb from an estimated 1.4% of outstanding junk debt this year to 4.5% in 2008 and 5.6% in 2009, according to Moody’s.

The default rate probably would climb even higher if the economy were to go into recession, said Daniel Gates, Moody’s chief credit officer for corporate finance in North America.

A 4% annual default rate would be in line with historical averages. As recently as 2002, however, the rate soared to 11% amid the financial crash of companies such as Enron Corp.

Rising defaults could weigh down prices of junk bonds, depressing returns to investors who own the debt.

Investors’ appetite for speculative-grade debt has all but disappeared in the last two months. The troubles began as delinquencies and defaults surged on sub-prime mortgages.

Wall Street has since turned skittish about financing any high-risk borrower. That will make it difficult for junk-rated companies to get new financing if they begin to run into financial trouble, analysts say.

Many of the expected bond defaults in the coming year may be triggered by companies simply running out of cash to sustain their businesses, Gates said.