Tuesday, March 10, 2009

Kodak, MGM Mirage Among Firms at Highest Default Risk

Eastman Kodak Co. and MGM Mirage are among 283 U.S. companies likeliest to default, about a quarter of speculative-grade issuers, as a deepening recession raises the risk that borrowers may miss interest payments.

The number of high-yield, high-risk issuers on the “Bottom Rung” list compiled by Moody’s Investors Service almost doubled from 157 a year earlier, the New York-based ratings company said in a report published today.

The extra yield investors demand to own speculative-grade bonds is surging at the fastest pace since November on concern the longest recession since at least 1982 may turn into a depression, pushing company defaults to a record this year. Junk bonds have lost 8.5 percent since Feb. 10.

“The current Bottom Rung list provides ample evidence of a severe default cycle,” analysts David Keisman, Tom Marshella and Jennifer Brown wrote in the report.

More than 23 percent of all U.S. speculative-grade companies are on Moody’s list, compared with 9 percent before the credit crisis. So-called junk-graded companies worldwide defaulted on their bonds at a rate of 5.2 percent in February, the ratings firm said in a separate report last week, as $1.2 trillion of bank losses combined with a global recession hamper borrowers’ finances. Moody’s expects the default rate to rise to 14.8 percent by the end of this year.

Weaker Consumer Spending

Companies facing weaker consumer spending, such as auto, retail and media firms, are “highly represented” on the list, Moody’s said.

MGM Mirage, which owns 10 Las Vegas casinos and was added to the “Bottom Rung” this quarter, has $8.1 billion of bonds outstanding, with $1.28 billion coming due this year, according to data compiled by Bloomberg. Gambling revenue in Las Vegas, the biggest betting center in the U.S., fell the most on record last year, causing declining sales at MGM Mirage.

Yvette Monet, a spokeswoman for MGM Mirage, didn’t immediately return a phone call seeking comment.

Rochester, New York-based Kodak, another new entrant, has $1.4 billion of bonds outstanding, including a $500 million facility maturing in October 2013, Bloomberg data show. Kodak, founded in 1880 by camera pioneer George Eastman, saw its profitable film business “evaporate” as digital cameras gained dominance, Chief Executive Officer Antonio Perez said in an interview on Feb. 5.

‘Financially Solid’

“Any speculation, however informed, suggesting that Kodak is less than financially sound is irresponsible,” said Kodak spokesman David Lanzillo. “Kodak is financially solid, and we are taking the right actions to ensure that we remain a strong and enduring competitor.”

Jeffrey Benner, a spokesman at Moody’s, said he couldn’t immediately comment.

Speculative-grade debt is ranked below Baa3 by Moody’s. “Bottom Rung” companies are ranked six steps lower at B3 with a negative outlook or on review for downgrade, or have probability of default ratings of Caa1 or lower, Moody’s said.

Spreads on high-yield bonds widened 127 basis points last week, the biggest increase since the week ended Nov. 21, according to Merrill Lynch & Co.’s U.S. Corporate High-Yield Master index. A basis point is 0.01 percentage point.

Lear Corp., the world’s No. 2 maker of automobile seats, also became one of the companies most at risk of defaulting in the first quarter, according to the Moody’s report. Mel Stephens, a spokesman at the Southfield, Michigan-based company, which posted a fourth-quarter loss of $688.2 million in January, wasn’t immediately available to comment.

Moody’s “Bottom Rung” is a new database and quarterly publication, the ratings company said. The list will be updated monthly.

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