Credit rating agency, Standard & Poor's warned yesterday that corporate America is set to be hit by a new wave of business failures as the credit crunch forces weak, highly leveraged, companies to default on USD 35 bn worth of debt. 75 junk-rated companies, particularly in the media, healthcare and consumer products sectors, are at a high risk of default over the next 15 months. S&P's head of corporate ratings, John Bilardello said the level of defaults could turn out to be much higher if the economy and the debt markets were to worsen further in 2008. He further added that this week's 50 basis point cut in interest rates would help sentiment and economic activity but warned that there was a risk of a full-blown debt crisis like the one in 2001-02 when USD 250 bn worth of corporate bonds defaulted.

The majority of new defaults are likely to be found among companies with weak financials that over the past few years took advantage of over-accommodating capital markets to load up their balance sheet with debt. S&P said "These companies are highly reliant on financial market access to support operational cash needs, but the plentiful liquidity for high-yield borrowers is almost surely a thing of the past". The problem has been amplified by a steady rise in the proportion of US companies with a junk bond rating. Companies rated "B", the most common junk bond category, or lower, by S&P now make up some 40% of the US corporate universe outside the financial sector, up from 35 % a decade ago. According to S&P, these companies have an average debt to earnings before interest, tax, depreciation and amortization (EBITDA) of about 6 - a historically high level that will stretch their ability to repay creditors in the coming months. More corporate bloodshed seems certain, with billions-worth of bonds coming due in the next few months.

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