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Defaults Continue to Soar in 1999

NEW YORK (Standard & Poor's CreditWire) August 17, 1999 – The number of corporate defaults is soaring this year, leaving little doubt that 1999 will register the largest number of rated defaults ever, Standard & Poor's announced today. (Because the universe of rated companies has expanded dramatically, the percentage of rated defaults is unlikely to exceed that of previous years.)

Already, more rated companies worldwide have defaulted this year than in all of 1998, Standard & Poor's says in a special report entitled "Defaults Soar in First Half of 1999." In the first six months of 1999, 55 rated or formerly rated companies defaulted on a total of $20.5 billion of debt, while in 1998, 51 companies defaulted on a total of $10.9 billion of debt, Standard & Poor's said.

(Standard & Poor's will hold a teleconference to discuss the default numbers on Thursday, Aug. 19, 1999, at 10 a.m. Eastern Time.)

"The 1999 numbers stand out because 1998 saw a record number of defaults - more rated companies defaulted in 1998 than in any year since 1991," said Nicholas Riccio, managing director in Standard & Poor's Corporate Ratings Department. "We are already past that this year, in some degree due to the market's increased appetite for risk, as well as the fallout from the Asian and Russian economic crises."

In 1991, 65 companies defaulted on a total of $19.8 billion of debt, Standard & Poor's said. The lowest rate of default after 1991 occurred in 1993, when seven companies defaulted on $1.425 billion of debt.

As has been found in previous Standard & Poor's default studies, there is a well-defined correlation between credit quality and default remoteness: in other words, the higher the rating from Standard & Poor's, the lower the probability of default, and vice versa.

The report notes that, over the past few years, investors have shown a greater willingness to invest in more entrepreneurial firms at an earlier stage of development. Unlike in the 1980s, when many well-established companies went private through leveraged buyouts, in the 1990s a substantial number of new issuers often have been smaller firms, many with relatively short track records and sometimes engaged in risky businesses.

"The bottom line is that while many high-yield issuers in the last few years have shared the leverage characteristics of their counterparts in the 1980s, in many instances they also exhibited a fair amount of business risk," Mr. Riccio said. "This accounts in part for lower ratings and a higher rate of defaults, even during a favorable economic period, such as the one in the U.S. right now."

In addition, companies continued to suffer the impact of the Asian and Russian financial crises, which prompted commodity prices worldwide to plummet and borrowing costs for high-yield issuers to skyrocket, the report says.

"In practice, this meant that some marginal companies could not roll over some of their long-term debt when due," the report says. More dramatic, currency devaluations and income drops associated with the crises have driven prices for such commodities and services as oil, gas, iron, steel, and dry bulk shipping to lows not seen since 1987.

"Hardest hit have been oil and gas, whose plunging prices pushed six companies over the edge in North America in the first half of 1999, and have had devastating effects on the economies of oil-exporting countries such as Mexico, Russia, and Venezuela," the report says.

For a copy of the report, members of the media should contact Christina Pretto in Standard & Poor's Communications Department at (1) 212-438-2757. – CreditWire



Leo Brand,
New York: (1) 212-438-2407
Christina Pretto,
New York: (1) 212-438-2757

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