Updated from 2:13 p.m. EST
If investors needed additional proof that the bubble has burst, the number of bond defaults in 2001 may provide it.
With the New Economy ruptured and the overall economy sluggish, bond defaults for issuers with speculative-grade and investment-grade ratings alike hit their highest levels in years in 2001.
Last year, 211 issuers defaulted on $115.4 billion in debt, credit-ratings agency Standard & Poor's said Monday. The number of defaults and the cumulative amount trounced the previous record set in 2000, when 132 firms defaulted on $42.3 billion of debt.
The defaults were concentrated in the telecom sector, which accounted for 18.5% of the total. The largest default came from
, which backed out of $6 billion in debt. Former highfliers
S&P expects defaults to continue in 2002 because they tend to come later in economic downturns. "In a typical cycle, defaults peak six months after an economic bottom," said Diane Vazza, head of Global Fixed-Income Research at Standard & Poor's. She expects the economy to finally bottom in the first quarter.
Telecom nonpayments began to ease at the end of last year, with six reported in the fourth quarter. In 2002, Standard & Poor's expects defaults to be more broad-based than they were last year, though the agency is forecasting some "concentrated weakness in certain areas of consumer products and retail." So far this year, S&P has counted seven corporate defaults totaling $5 billion.
The default rate for issuers of
junk bonds was 8.57%, the highest level since 1991, when 10.87% of high-yield debt issuers couldn't come through with their payments. In 2000, 5.68% of firms with speculative-grade ratings defaulted, S&P said.
S&P said 0.27% of issuers with investment-grade ratings defaulted last year, up from 0.15% in 2000. The record level, 0.28%, was set in 1982.
Most of the defaults, 162, occurred in the U.S., while Argentina was second with 15, including 10 banks that defaulted after the government imposed limits on bank account withdrawals. The ratings agency expects additional defaults in Argentina as the nation's economic conditions remain volatile.
Pacific Gas & Electric
, a unit of
Southern California Edison
, part of
, accounted for 20% of the dollar amount of last year's nonpayments.
"It's extraordinary for investment-grade issuers to default at all," said Carol Levenson, director of research at Gimme Credit, an independent research service for institutional investors on corporate bonds. "I'm skeptical about saying things have bottomed out, or that we've seen all the impacts of the recession."
Investment-grade defaults in 2001 also included
Vazza said the number of defaults should peak at the beginning of the summer, when junk-bond default rates could reach 11%, but she expects the rate of nonpayments to trail off by the end of the year.
Patrick Cassidy, vice president and head of corporate research at T. Rowe Price, suggested the worst is over. "What we have seen is a topping out of defaults, and a bottoming of credit quality," he said. "When things are going well, it's not uncommon to extrapolate that they'll only get better. A correction was in the cards. We got one, and it was pretty dramatic."