More corporate bonds are in danger of being considered "junk" than in 18 years.
For the companies, that means their costs to borrow money in the bond market are rising at a time when business conditions are deteriorating. For investors it means more risk of default, but higher potential returns.
Standard & Poor's, a debt-rating agency, keeps a tally of "fallen angels." Those are companies whose debt has been cut to noninvestment grade (BB+ or lower) from investment grade (BBB- and higher).
So far this year, there have been eight fallen angels in a range of industries, but there are 75 more that are barely clinging to their investment-grade rating.
Downgrades can come for a host of reasons, but at the root of them all is a ratings agency's outlook on a company's ability to pay back its bondholders.
Poor earnings, low cash flow or too much leverage are among the reasons S&P has downgraded company debt to junk recently.
And the firms on S&P's list of potential fallen angels aren't fly-by-night operations. Many are household names including Macy's (M), J.C. Penney (JCP), Sotheby's (BID) and Dr Pepper Snapple (DPS).
Some investors see good opportunity in investing in the higher-yielding debt of companies they believe could bounce back after the recession ends. But if a company does default, some or all of an investment could be lost. It is often up to a bankruptcy court to decide. And bonds are expected to default at alarming rates.
Diane Vazza, managing director at S&P, estimates that junk-bond default rates will rise to 13.9 percent this year, compared with an average of 4.4 percent since 1981.
