According to Moody’s, the credit rating and investor service firm, the default rate on high-yield or junk bond debt is likely to increase substantially from the current level of 1.4%. Moody’s predicts that the default rate will rise to 4.1% by August 2008 and then to 5.1% by August 2009. 

  • As reported by Credit, Moody’s director of corporate default research believes that "higher spreads and diminished liquidity" have increased the default risk for distressed issuers.
  • Unless the U.S. economy falls into a recession, however, the default rate is predicted to stay below its long-term average of 5.0%, at least until 2009. Any real downturn in the economy could push the default rate higher.

The New York Times DealBook Blog has a similar story, pointing out that Moody’s predicted in another report that the U.S. industries likely to have the highest default rate are packaging, construction, consumer durables, and automotive. Also, companies that need new financing will be more at risk than firms that already obtained financing on the favorable terms available in the credit markets until recently.

As The DealBook Blog points out, a rising default rate will likely lead to an increase in Chapter 11 bankruptcy filings. Stay tuned.