Corporate Loan Defaults on the Rise

In a trend that is both scary and familiar, corporate loan defaults have risen to a five year high in the month of August. The defaults are concentrated among smaller companies in troubled industries. The mortgage meltdown was once thought to be confined to a small number homeowners with subprime loans. However, that myth was quickly dispelled when the crisis spread industry-wide.

Now many analysts fear that the same thing could happen with corporate loans. Defaults rose to 3.3 percent in August. At the end of 2007 that number was just .24 percent, accounting for about 400 loans.

The loans that have gone bad seem to be concentrated in two industries: real estate and auto parts, which account for nearly half this year’s defaults, according to Standard & Poor’s. However, with lenders tightening credit standards, it could put many businesses in peril.

"The tightening already appears to be more widespread than it was during the early 1990s," said Eric Rosengren, the president of the Federal Reserve Bank of Boston, in a speech this week, "and portends more difficulty in financing business fixed investment and commercial real estate projects in the second half of this year."

Because of this many companies that would have received leeway from their bankers in the past, will now receive only a cold shoulder and possibly a bankruptcy notice.

Source The International Herald Tribune:

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