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More Companies Facing Credit Risk

With homebuilders, real estate companies and even Wall Street firms taking a hit from the credit crunch, it’s worth taking a look at the balance sheet of Corporate America.

The most vulnerable sectors are those driven by consumer spending, according to Dianne Vazza, Standard & Poor’s Managing Director of global fixed income research, which recently released a “Stress in Corporate America” report.

S&P identified 224 companies – all under the general category of consumer discretionary – as experiencing the highest levels of credit risk. (The companies’ credit ratings ranged from A+ to CCC.)

The report mentions consumer products, media and entertainment, and retail and restaurant companies as those experiencing high levels of credit risk.

Debt Market

Overall, Corporate America’s balance sheet is in pretty good shape, experts say, with net debt of the S&P 500 down since 2001, but leverage is on the rise.

Here are a few yardsticks.

Investment-grade bond new issuance stands at $702.4 billion for the year to date, compared to $547.5 billion for the same period of 2006, according to data provider Dialogic.

High-yield new issuance stands at $145.39 billion for the year to date, compared to $118.54 billion for the same period last year, according to Prospect News, a newsletter service focused on debt markets.

Bank loan deal volume is up at nearly $694 billion, versus almost $540 billion in the same period last year, according to Prospect News.

Default Rates

The default rate declined again in October to 1.1%, from 1.2% in September, and now stands at its lowest rate since March 1982, according to Moody’s Investors Service.

But debt is beginning to pick up again, which means the default rates likely to rise as well, as companies find it harder to obtain rescue financing, says Louise Purtle, chief strategist for CreditSights.

CreditSights is predicting the default rate will rise to 4.6% by this time next. Moody’s expects a 4.0% default rate.

“Subprime mortgage reset rates don’t even peak until the second quarter and that may precipitate a new wave of defaults and foreclosures that will hurt all financial markets as they are all exposed to subprime,” explains Purtle.

Borrowing Spreads

There’s been steady pressure on credit market risk premiums in recent weeks.

According to S&P, risk premiums have increased since July in both bond and loan markets. Investment-grade bond spreads have increased by 31 basis points, and speculative-grade bonds have increased by 111 basis points, S&P said in its Nov. 6 U.S. credit report.

A number of things could push spreads even wider, including more bank downgrades, more write-downs and a distressed merger between investment bank players.