U.S. corporates will face challenges in accessing financing next year, says Fitch

By Reshmi Basu

New York, Nov. 8 - The days of cheap refinancing may be over for U.S. corporations next year as $39 billion of junk bonds mature in 2006, according to Fitch Ratings.

In previous years, banks loosened loan standards at lower costs, resulting in a borrower's market, said Mariarosa Verde, managing director for credit market research.

Corporates did not necessarily use that cash to reduce debt. Many opting instead to boost equity returns, a concern to the rating agency.

But now, U.S. corporates' ability to access funds will be challenged, given that the pool of junk-rated corporates has jumped.

Verde noted that 20.8% of U.S. corporate debt is now recorded as junk, compared to 16.4% just five years ago.

The signs of strain are beginning to surface, she noted, adding that $125 billion or around 16% of high-yield issuers are rated at CCC to C.

Moreover, these bottom tier issues are "falling behind in reporting fundamental improvements," noted Verde, which means that upgrades within that segment are unlikely.

"The ability to refinance next year for the speculative pool is critical," Verde noted, given the large number of "vulnerable bonds."

The chance of default risk is highest three to four years after bond issuance. This is bad news for many of the "vulnerable bonds" next year, she added.

The high-yield market may see the "phenomenon of default contagion" as the market looses confidence with the lack of upgrades in the CCC ratings pool and higher chances of default, remarked Verde.

In 2001 and 2002, recovery rates dropped to new lows of 15%, 26%, respectively but in 2003 and 2004, the rates returned to historical highs of 43.7%, 61.5% respectively.

Defaults in the third quarter increased to $7 billion from $2.8 billion for the first half of the year.

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