Moody's Investors Service predicts that the number of U.S. corporate defaults will more than quadruple next year from 1% to 4.7%, due to the slowing economy, according to Bloomberg News.
According to research by Merrill Lynch, corporate bonds returned just 3.08% in 2007. In comparison, treasury bonds returned 7.79%. Merrill is calling 2007 the worst year for company debt since 2000.
"When the economy slows down, there's going to be more defaults and more companies going into junk land," said Mirko Mikelic, a senior bond fund manager at Fifth Third Asset Management in Michigan.
Jones Apparel Group, Residential Capital and 31 other companies were downgraded to junk by Moody's this year. Moody's also reduced the ratings on 389 corporate issues this quarter.
Fallen angels, or companies that lost their investment-grade rankings, include Boston Scientific, Dallas Morning News owner Belo and Nuveen Investments of Chicago. Not since WorldCom and Adelphia Communications filed for bankruptcy in 2002 have so many companies been cut to junk status.
"The economy will be the prevalent factor for the rise in the number of fallen angels," said Sabur Moini, a portfolio manager in Los Angeles at Payden & Rygel. "Financing is more difficult, so you can't put as much leverage in a company as before."
