« back to Today's Commentary

Default Disaster Not Over Yet
-- January 14, 2002

Corporate defaults hit a record high last year as more than 200 companies defaulted on more than $100 BILLION-worth of debt. Plus, the default rate on junk bonds reached a 10-year high -- with 1 in 10 companies defaulting on their junk bonds, according to Moody's. Sounds bad, doesn't it?

But lo and behold, S&P; and Moody's both issued rosy press releases along with these dismal numbers, essentially saying 'the worst is over.' We disagree. Even if the worst is over (and that remains to be seen), it's certainly not a good time to invest in risky corporate bonds.

There are hundreds of publicly traded companies on our radar screen that we think are headed for bankruptcy, and new ones appear every day. And those are just the companies that have been forthright in their financial statements. There's no telling how many Enrons are lurking out there -- deliberately doctoring their financial statements to mask their vulnerability.

Even with their rosy predictions for 2002, the ratings agencies admit that the default rate will remain above average for junk bonds. That's far from a ringing endorsement.

related article: Bond Defaults May Drop From Decade High, Moody's Says