NEW YORK (AP) – Defaults among companies with speculative-grade credit are likely to more than double over the next year, Moody's Investors Service said Tuesday.
Investor appetite for speculative-grade credit has all but disappeared in the past two months. The troubles began as delinquencies and defaults among subprime mortgages — loans given to customers with poor credit history — rose rapidly.
Investors became worried bonds backed by those loans would fail, and the problems would spread beyond that market. Now, investors are avoiding nearly all low-grade investments for fear of default.
“The earlier period of easy market standards may have only postponed the day of reckoning for companies that have persistent negative cash flow or flawed business models,” Dan Gates, Moody's chief credit officer for corporate finance said in a statement.
Since July, more than 50 planned high-yield and leveraged-loan transactions have been deferred because of the unfavorable conditions in the market, Moody's said.
Many of the defaults and bankruptcies in the coming year may be triggered by companies simply running out of cash to sustain business, because most used strong markets in the past few years to relax financial covenants on their bank credit facilities, Gates said.