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Moody’s: Defaults On Lower-Rated Bonds Could Spike

Indebted companies are feeling pressure as funding markets dry up.

Credit ratings firm Moody’s warned that defaults on lower-rated corporate bonds could increase to 9.7% of unpaid debt in a “pessimistic scenario.” The historical average is 4.1%. The default rate reached 13.4% during the financial crisis.

The cost of injuring against junk debt defaults increased Thursday to its highest level in the U.S. since 2011, amid credit default crisis, and the loftiest in Europe since 2012.

Certain companies are paying more for short-term borrowing, while the premium that investors demand on riskier commercial paper versus the safer equivalent rose to its highest level this week since March 2009.

Several companies have drawn down their credit lines with banks or increased the size of their facilities to ensure they are liquid in case the crisis lasts a long time. Companies fear lenders may not fund agreed credit lines as market turmoil might increase.

A major central bank official said that the situation is “pretty bad, as all stars are aligned in a negative way.”

The official added: “Cracks will start to emerge soon, but whether they will develop into something systemic is still hard to say.”

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