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S&P Ratings Chief Sees Credit Crunch Ahead

Defaults aren't relegated to subprime mortgage lenders and borrowers: Nick Riccio of Standard & Poor's cautioned that overleveraged U.S. corporations may be vulnerable to a credit crunch.

Riccio, S&P's managing director of corporate ratings, told "Power Lunch" viewers that recent years have seen lower and lower quality of debt issuance -- even at the bottom of the speculative category. He said that many firms are so leveraged that they have "no capacity" to react to unforeseen problems -- and that last year's spate of huge LBOs and acquisitions led to "a dozen major names" falling out of investment grade. He warned that interest rates rising even "a little bit," or liquidity tightening, could trigger a domino-like series of corporate defaults.

Riccio said that with the abundance of liquidity in the market, and investors continuing to "chase yield," the current corporate-credit tightrope walk will go on. But it "wouldn't surprise" him to see a market correction over the next 12 months -- which, he believes, would "shake people up" and put investors back on the less-risky "straight and narrow."

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