September 24, 2008 / 1:38 AM / 11 years ago

NYU's Altman sees 2009 default rate doubling

NEW YORK (Reuters) - The default rate for U.S. high-yield bonds could more than double in 2009 as Wall Street’s downturn grows into a Main Street recession, a leading U.S. bankruptcy professor predicted on Tuesday.

Ed Altman, Professor at New York University's Stern School of Business, speaks at the Reuters Restructuring Summit in New York September 23, 2008. REUTERS/Erin Siegal

Ed Altman, who teaches at New York University’s Stern School of Business, told the Reuters Restructuring Summit he expects the 2009 default rate could climb sharply.

“The default rate one year from now is probably somewhere around 8.5 percent to 9 percent,” Altman said, citing market-based measures such as the yield spread and distress ratio.

“That’s a big increase from today.”

In January, Altman had forecast 2008 high-yield default rates would reach 4.6 percent by the end of 2008. According to Standard & Poor’s the U.S. default rate was at about 2.37 percent in July.

“It’s unusual to find such turmoil and problems in the credit markets and at the same time a relatively low default rate,” Altman said at the summit in New York. “But I think that’s just a matter of time before that default rate escalates dramatically.”

Altman said he expects problems on Wall Street to expand into the corporate sector over the next year.

“We have not officially been classified yet as being in a recession, and yet we’ve had this turmoil which, of course, started in the financial markets,” Altman said. “Most people think, including myself, that it will spread and has spread to the real economy.”

Altman uses actuarial techniques to forecast default rates.

He also noted that this year’s corporate default rate could have been skewed significantly higher if investment bank Lehman Brothers LEHMQ.PK had been in the high-yield category when it filed for bankruptcy protection.

Lehman’s bonds were rated at investment grade, rather than junk bonds, when it filed for bankruptcy protection — an occurrence Altman says has happened less than a half-dozen times in U.S. history. That means that Lehman did not fall into the high-yield debt category. If it had been high-yield at the time of the bankruptcy, Altman estimates it could have added as much as 15 percentage points to the default rate.

By comparison, when WorldCom filed for Bankruptcy protection in 2002 it added 4 percentage points to the high-yield default rate, Altman said.

Lehman’s bankruptcy, which listed more than $600 billion in assets, is the largest-ever U.S. bankruptcy filing, dwarfing WorldCom’s filing, which listed more than $100 billion in assets.

Reporting by Emily Chasan; Editing by Gary Hill

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