S&P's Vazza sees "avalanche" of default
NEW YORK (Reuters) - An "avalanche" of U.S. high-yield bond defaults could hit after August next year, a scenario that is sparking more interest from distressed debt investors, Standard & Poor's Managing Director Diane Vazza told the Reuters 2008 Restructuring Summit on Wednesday.
Vazza said S&P sees defaults rising to 4.9 percent by August 2009 in a "baseline scenario" mild recession lasting about a year, versus 2.5 percent in August.
"The avalanche could very well be after that forecasting period," said Vazza, who heads S&P's global fixed-income research.
If the United States slipped into a severe recession lasting more than a year, default rates could soar to 8.5 percent, Vazza said, adding that Europe might not be far behind.
"We get daily phone calls either from hedge funds or (private equity) firms," Vazza said. "They're circling now and they're certainly going to be opportunistic."
Years of easy lending and a wave of leveraged buyouts by private equity firms created the environment for rising defaults, according to Vazza.
About 70 percent of bond defaults this year came from companies that had private equity investment at some point, Vazza said.
As recently as the first half of 2007, "asset managers were still searching for yield and literally throwing money at companies, even at the weakest end of the spectrum," she said.
Weakening overseas economies could cause defaults to spread beyond the United States, where most are occurring now, Vazza said.
"Europe is not far on the U.S.'s heels," she said.
Business confidence dropped in Germany, France and Italy in September, surveys showed on Wednesday, adding to fears the euro zone is sinking into recession as the effects of U.S. financial turmoil spread. Germany, France and Italy have the biggest economies in the 15-nation euro zone.
Ratings, a good indicator future default risk, are set to deteriorate, Vazza said in a separate article on Wednesday.
The number of companies worldwide at risk of a downgrade rose to 758 this month, 11 more than last month and a three-year high, Vazza said. About 33 percent of all savings and loans are poised for a downgrade and about 40 percent of all mortgage institutions, the report found.
(For summit blog: summitnotebook.reuters.com/)
(Editing by Richard Chang and Gerald E. McCormick; Editing by Gary Hill)
