Sectors On The Verge Of Collapse

Deeply indebted airlines, media and cable operators, as well as companies dealing in paper products and packaging, are most likely to go under within the next year, according to a report released on Monday from research firm CreditSights.

Taking the 628 companies with high-yield junk bonds and rating agency scores, Louise Purtle and Kai Gilkes from CreditSights measured the likelihood that they will default on their debts -- often an early step on the path to bankruptcy. The airline, media and paper sectors pose the greatest threat to bond investors. The average airline has a 12% chance of defaulting within a year, for instance. Among the high-risk names in these sectors are Air Canada (61% probability), theMcClatchy ( MNI - news - people ) Co. newspaper chain (47%) and Catalyst Paper Corp (43%).

Other well-known companies on the at-risk list: Accuride Corp. ( ACW -news - people ) (59%); Bon-Ton Stores ( BONT - news - people ) (41%); Nortel Networks ( NT - news- people ) (36%); and Clear Channel( CCU - news - people ) (34%). A score above 20% implies a strong chance of financial trouble and looming default.

In spite of climbing default rates, bonds issued by debt-heavy companies have recently surged. High-yield bonds are up 22.7% in the past three months, encouraging newly confident investors to shift cash into fixed-income mutual funds. The rally means that investors stepping in now will face higher risks, as more issuers miss interest payments, in exchange for diminishing rewards, the report notes. Companies are still shouldering too much debt while their earnings drop.

But the recovery has also allowed companies to pay down debt by raising cash with new bonds. Higher bond prices mean lower interest rates for corporate debt, which has dampened predictions of default rates nearing 20%. (See "Credit Markets Dip Into Absurdity.")

The rating agency Standard & Poor's forecasts defaults to climb from the current 8.1% to 14% in the first three months of next year, a record failure rate. (See"Default Rates To Set Record.")

When companies go bankrupt, bond investors can expect to receive some compensation. Witness, for instance, the fight over General Motors( GMGMQ.PK - news -people ), in which bond investors successfully fought for better terms. In the past, investors typically recovered 30% to 40% of their bonds' face value.

That will surely change, CreditSights says, thanks to a lack of debtor-in-possession financing, the layers of debt added during the credit boom and the market for credit default swaps, insurance on bonds. An insurance payout could encourage some creditors to push a company into liquidation.