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Corporate defaults: Why so many?

The figures are alarming. A worldwide survey by Standard & Poor's shows that 55 rated companies failed in the first half of 1999, defaulting on total debts of $20.5 billion. That easily exceeds the 37 failures and $8.3 billion in defaulted debts in the second half of 1998, when the rising default trend began. What's worrying is that, while common sense and historical data teach that the level and volatility of default rates rises in a recession, the US is in anything but that.

Most of the defaulters - 39 out of 55 - are US-based. The phenomenon spans all sectors, from shipping to coal mining, restaurants to medical supplies. One common thread is that many of the companies are young, with 46 having been rated for five years or less.

Nicholas Riccio, managing director of corporate ratings at S&P, argues: "There is no macroeconomic explanation behind this upsurge. They are just companies run badly in a US economy that is performing very well. They are basically individual business failures: companies that just could not cope with competitors because of their internal weaknesses."

According to Riccio, the trend is the natural consequence of the boom in the US high-yield bond market since it recovered from the crisis of 1990-91.

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