Junk Bond Default Rate Headed Higher

The global junk bond default rate is likely to end the year at a higher-than-forecast 8.8% after companies missed payments on a record $42.6 billion of debt in the second quarter, Moody’s Investors Service said Monday.

Forty-two companies defaulted on their debts in the second quarter, Moody’s said. The rating company in April predicted the default rate would end the year at 7.4%.

In the first half, companies with $76 billion of bonds outstanding failed to pay interest or declared bankruptcy, leaving the default rate at 10.3%, Moody’s said. The rate, which doesn’t include this month’s record bankruptcy filed by WorldCom Inc., is expected to decline in the next six months as the economy improves, increasing companies’ ability to pay their debts, Moody’s said.

Junk bonds have returned negative 9.1% this year, including interest, and last week suffered their worst week in nearly 11 months, Merrill Lynch & Co. reported.

Among the largest first-half defaults: cable operators NTL Communications Inc., with $8.5 billion of bonds, and Adelphia Communications Corp., with $6.9 billion; telecom operator Global Crossing Ltd., with $3.8 billion; and retailer Kmart Corp., with $2.5 billion.