Defaults costlier for US bond, loan investors-Fitch

NEW YORK, July 7 (Reuters) - Investors were hit with a double whammy in this year's bankruptcy wave as defaults quadrupled and the amounts recovered on defaulting bonds fell by more than half, Fitch Ratings said on Tuesday.

Investors got back just 21.8 percent of their investment on defaulting bonds in the first half of the year, down from 45.8 percent in full year 2008, Fitch said in a statement. Recoveries on defaulting loans fell to 57.5 percent from 68 percent in 2008 and 96.3 percent in 2007.

"The weak economy and still difficult funding conditions are having a unwelcome dual negative effect on credit losses --- driving up corporate defaults and simultaneously depressing recovery rates," Mariarosa Verde, head of Fitch's credit market research, said in a statement.

The junk bond default rate soared to 9.5 percent in the first six months of the year from 2.4 percent a year earlier, according to Fitch data. It is expected to end the year between 15 percent and 18 percent, Fitch said.

"While some signs have emerged that the U.S. economy is stabilizing, Fitch believes that defaults will not ease in 2009 or likely even in 2010," the rating agency said.

Fitch's view is gloomier than those of the two other rating agencies. Moody's Investors Service expects the U.S. default rate to peak at 13.5 percent in the fourth quarter this year, while S&P expects defaults to hit 14.3 percent by the first quarter of 2010.

During a boom in lower-quality loan issuance between 2005 and 2007, loans became a bigger part of companies' balance sheets, leaving a smaller cushion of bonds to absorb losses. Protections that traditionally came with loans, such as covenants, or terms limiting a company's debt, were also eroded during the credit boom.

"Fitch believes that the combination of shrinking debt cushions and covenants has and will continue to depress loan recovery rates in this downturn," the agency said. (Reporting by Dena Aubin; Editing by Kenneth Barry)