Junk bond default rate seen spiking

NEW YORK (CNNMoney.com) -- Defaults on junk bonds are expected to skyrocket in the coming year as economic growth slows, the investment rating service Moody's said Thursday.

The rate at which speculative-rated companies will default on their debt - commonly referred to as junk bonds - is projected to jump to 4.2 percent, more than four times as high as the present 1 percent rate, according to Moody's default analyst Kenneth Emery.

Emery's projection is based on the assumption that economic growth in the United States will slow considerably in the coming year, but that there won't be a recession.

If the nation were to see a full recession, "default rates could increase to near double-digit (percentage) levels," he said in a press release.

The current global default rate is at a nearly 26-year low, a result of several years of easy credit conditions. It is down from 1.9 percent a year ago.

Lenders only began tightening their terms in July amid the first signs of the subprime mortgage-inspired credit crunch.

"Current rates reflect the easy credit conditions of the past couple of years ... and strong economic growth which has allowed issuers to make their debt service payments," said Emery in the release.

The percentage of borrowers whose debt is trading at junk levels reached 10 percent in November, its highest level in almost five years, and up from 7 percent last month.

"The number of distressed issuers has increasing substantially in the last six months," Emery told CNNMoney.com. "That is a good indication that there's going to be upward pressure on default rates ahead."