High yield issuance surge could lead to rise in defaults, S&P warns

New York, July 21 - The recent surge in junk bond issuance raises the risk of a deterioration in credit quality and could lead to a higher default rate, Standard & Poor's warned Monday.

The rating agency noted that record inflows of capital into high-yield funds and an increase in the number of funds has prompted issuers to bring lower quality deals to market.

S&P specifically cited Western Wireless Corp.'s $600 million offering, rated CCC, and Cincinnati Bell Telephone's transaction, also for $600 million, rated CCC+.

During the second quarter, deals rated B- and lower accounted for 28% of all high yield issuance, up from 21% for 2002 and 19% for 2001. Issuance at B- and below is "typically a breeding ground for potential defaults," S&P commented.

The previous spike in new offerings rated B- and lower was in 1997 to 1999 when they consistently account for more than 30% of total volume - and led to a peak in defaults in 2001.

"If this proportion were to exceed the 30% range this year and stay there for a sustained period of time, it will serve as an early warning that the speculative-grade default rate could worsen in three years, which is typically the length of time between elevated issuance and higher defaults," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research group, in a news release.

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