Fridson sees double-digit bond defaults

NEW YORK (Reuters) - The default rate for U.S. high-yield bonds may climb to 10 percent or more as highly leveraged companies fail, Martin Fridson, chief investment officer at Fridson Investment Advisors, told the Reuters 2008 Restructuring Summit on Tuesday.

Fridson said if the United States falls into a severe recession similar to the 1990-1991 period, default rates may climb to 15 percent or higher, a level not reached since 1933. U.S. high-yield default rates are now below 3 percent, according to rating companies Moody's Investors Service, Standard & Poor's and Fitch Ratings.

A year-long credit crisis has hit financial companies with $500 billion in paper and real losses, according to various Wall Street estimates, and may end up costing as much as $1 trillion, according to the International Monetary Fund.

The collapse of the U.S. housing market stemmed from record loans to subprime mortgage borrowers who later defaulted on their mortgage payments. Wall Street exacerbated the problem by taking those subprime mortgages and repackaging them into complex debt that later lost value.

At the same time, as those bonds lost value and buyers for new debt became scarce, lenders were less willing to finance new mortgages, further freezing the housing and credit markets.

"It's not just a hangover from some excesses but a really severe, more like acute, alcohol poisoning, coming from that party," said Fridson, a U.S. high-yield bond market veteran and manager of a $240 million fund. "What's driving (default rates higher) now is that many deals were done with very high leverage."

For now, it is too early for investors to take bets on distressed corporate bonds or mortgage assets, but Fridson said health care and some other service sectors may be good sectors to begin looking for opportunities.

"Health care is a prominent one that's pointed to as being, if not entirely impervious, not sensitive to commodity prices and a service that has an ongoing need in good times and bad," he said.

Fridson said there also may be investing opportunities in consumer non-durables, and the food and beverage industries.

"You can't make a blanket statement about them, but these are some sectors where you have some comparative insulation," he said.

Fridson, in a wide-ranging interview, also said he sees a one in four chance that the U.S. government's $700 billion bailout plan for the banking industry may climb to $1 trillion.

A sticking point is how the government plans to value problem mortgage debt it is taking from Wall Street banks.

A solution could be for the government and financial companies to agree to share any potential gains when the assets are finally sold back to the market, Fridson said.

That "might mitigate wrangling over the price," Fridson said.

(Editing by Theodore d'Afflisio, Dave Zimmerman, Brad Dorfman)