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One in 20 US firms to default in 2003
Source: Reuters
Date: December 2, 2002
Author: Jonathan Stempel
NEW YORK, Dec 2 (Reuters) - Moody's KMV, a private firm that gauges credit risk, on Monday said it expects defaults next year to match this year's estimated rate, projecting about one in 20 of the U.S. companies it tracks is likely to default on debt in the next 12 months.
The data from the San Francisco-based unit of Moody's Corp. (MCO.N) paint a gloomy picture for the health of U.S. companies because they include companies carrying "investment grade" ratings, as well as those with "junk" ratings, which are considered more likely to default.
IDC said about 350 U.S. companies, or 5 percent of those it tracks, are likely to default on debt in 2003, roughly even with its projected rate for this year and higher than the 3.5 percent rate suffered in 2001.
"Businesses' values have fallen, and the values themselves have become more volatile," said Tim Kasta, a managing director at KMV, in an interview. "Investors are growing more uncertain in forecasting firms' future value. That means a higher default probability, which means on average a higher cost of funding and a lesser ability to raise capital."
Companies such as cable TV operator Adelphia Communications Corp. (ADELQ.PK), telecommunications company Global Crossing Ltd. (GBLXQ.PK) and phone company WorldCom Inc. (WCOEQ.PK) have this year already defaulted on record amounts of debt.
Moody's rating arm Moody's Investors Service, whose rating universe is smaller than KMV's, said last week that 120 issuers with $141 billion of bonds have defaulted in 2002 as accounting scandals mushroomed, U.S. economic growth slowed, business spending contracted, and customers bought fewer products.
Still, he said holders of unsecured debt -- that is, debt backed not by collateral but by an issuer's promise to pay -- from defaulting U.S. industrial companies might expect to lose a record 66 cents per $1 of principal next year.
"Because defaults are unusually high, recoveries are unusually low," Kasta said. "This economic cycle has been a wake-up call for many investors who are now revisiting their buy-and-hold strategies for corporate credits."
Moody's rates investment-grade companies "Baa3" or higher, and junk-rated companies "Ba1" or lower. Moody's 12-month default rate for U.S. issuers was 8.3 percent in October, and was 9 percent for all issuers. It expects the global rate to fall to about 6.7 percent by next October.
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