Recovery prospects poor on many US junk bonds-Fitch

NEW YORK, April 24 (Reuters) - More than half of all U.S. junk bonds rated "B-plus" or lower may recover less than 30 cents on the dollar if they default, far less than the 40 cents investors typically recovered in bankruptcies, according to data from Fitch Ratings.

A "B-plus" is a mid-level junk rating, or four steps below investment grade.

Recovery prospects for unsecured bondholders worsened after highly leveraged companies relied more on the loan market for funding, pushing bond investors further down the priority ladder in claims on a companies' assets.

Issuance of loans to junk-rated U.S. companies rose 12 percent last year to $688.5 billion, according to Reuters Loan Pricing Corp. High-yield bond issuance, by comparison, fell 7 percent to $136 billion, according to Thomson Reuters data.

About 32 percent of bonds rated "B-plus" or lower may recover just one to 10 cents on the dollar, according to Fitch data. The recovery data is based on recovery ratings Fitch assigns to high-yield bond issuers and the historical recovery patterns at each rating.

The poor recovery prospects come as bond investors brace for a rise in defaults. Standard & Poor's on Wednesday forecast that the U.S. junk bond default rate will more than triple to 4.7 percent over the next year from 1.4 percent.

Recovery prospects are also being hurt by years of loose lending standards during the buyout boom. When loan terms, or covenants, were stricter, lenders could intervene if a company's financial health slipped, but those rights dwindled during years of easy money.

"The ability for a lender to step in and take some action at an early stage of deterioration of the company's finances is now gone in the absence of covenants or presence of weaker covenants," said William May, a senior director for credit market research at Fitch. "At the time of default, the debtor may be in worse condition than if a default had been triggered by a covenant breach."

Fitch expects defaults to rise to about 5 percent this year as a sluggish economy takes a toll on companies that were loaded with debt during the leveraged buyout boom.

"You have more companies at the low end of the rating scale, or the high end of the credit risk spectrum, so they are more susceptible to an economic downturn," May said. (Reporting by Dena Aubin; Editing by Diane Craft)