UPDATE 2-Global junk bond defaults hit 31-month high -S&P

Mon Jun 16, 2008 3:31pm EDT

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NEW YORK, June 16 (Reuters) - The global junk bond default rate rose to a 31-month high of 1.45 percent in May, up from 1.29 percent in April as tighter lending and faltering economies took a toll, Standard & Poor's said on Monday.

The U.S. default rate on junk bonds, high-yield debt that is below investment grade, rose to 1.89 percent in May, a 26-month high, from 1.64 percent in April. The rate is expected to rise to 4.7 percent within a year and there is a 20 percent chance it could go as high as 8.5 percent, S&P said. The default rate for European junk bonds was steady at 0.50 percent in May.

"Corporate casualties are piling up faster than in many years, as economic conditions deteriorate and volatility in the financial markets remains high," S&P said in a report.

A jump in the U.S. unemployment rate to 5.5 percent in May from 5 percent in April is another warning sign for rising defaults, S&P said. Historically, U.S. defaults have closely tracked the jobless rate.

The United States leads in corporate busts, accounting for 32 of this year's 33 defaults. U.S. defaults have risen from a 25-year low of 0.97 percent in December as fallout from the housing bust rippled through the economy and banks hurt by subprime mortgage losses tightened credit.

Companies that rely on consumer spending are especially hard hit. So far this year, 16 of the 33 global defaults have come from consumer-dependent sectors such as retail, restaurants, leisure and media, S&P said.

Year-to-date, $38.3 billion of debt has defaulted worldwide, up from $8.1 billion in all of 2007 and just $7.1 billion in 2006.

A recent debt refinancing by Residential Capital, the residential mortgage arm of GMAC, was included in this year's defaults because it is considered a distressed debt exchange, S&P said.

Rating agencies classify debt exchanges as defaults when bond investors are not repaid in full and the company involved could face bankruptcy without restructuring its debt.

Debt exchanges have been on the rise this year as money-losing companies restructure their debt to stay afloat. (Reporting by Dena Aubin, Editing by Leslie Adler)

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