Default Rates To Set Record

Standard & Poor's said today that it expects U.S. corporate default rates to reach 14.3% by March 2010, setting a new record for failures. Though managing director Diane Vazza and her team believe that the economy will hit its bottom in the third quarter of this year, defaults will continue to climb.

There were 38 failures in the first quarter of 2009, double the rate of a year ago. The 14.3% rate, if it's reached, is more than three times the long-term average default rate of 4.3%. About 17 companies will fail per month if the S&P forecast holds. That's up from eight per month in 2008.

S&P currently has 300 speculative grade companies on negative outlook, meaning that the ratings agency might see fit to downgrade their bonds even further. These include some large public companies like long-haul trucking firm Swift, airlines JetBlue ( JBLU - news -people ) and US Airways and radio conglomerate Citadel Broadcasting( CDL - news - people ).

Though some defaults or covenant breaches could be averted if lenders are willing to negotiate, S&P believes this is unlikely.

"Even as solutions are devised to mitigate the current stress, unwillingness on the part of financially battered, risk-averse lenders to extend forbearance agreements or rollover debt for all except the most creditworthy borrowers, could accelerate default flow," Vazza wrote.

That hasn't stopped firms from asking for help. S&P notes that the number of borrowers seeking to renegotiate their credit agreements has doubled every month this year, starting with 16 troubled companies pleading for looser terms in January and ending with 51 making such requests in March.

Under S&P's most optimistic scenario, default rates would come in at 11.5%. Under a worst case scenario, 18.5% of companies could default. The worst default rate is still 1981 where 13.0% of issuers got into trouble. S&P's forecast is another sign that this recession is easily the worst in the Post-Depression era.