NEW YORK (Reuters) - U.S. high-yield bond defaults 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 also said if the United States falls into a severe recession similar to 1990-1991 period, default rates may climb to 15 percent or higher, a level not reached since 1933.
“What’s driving (default rates higher) now is that many deals were done with very high leverage,” said Fridson, a U.S. high-yield bond market veteran and manager of a $240 million fund.
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 may also 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 key 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 firms 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