Bankrupt Bond Index Increases

The bankrupt bond index of Moody's Investors Service jumped 11% in April - the latest time frame for which statistics were available - but returns on bankrupt debt for the rest of 1999 remain uncertain.

Nevertheless, the April leap, largely due to mammoth gains in wireless cable debt, wiped out what had been a 2% year-to-date loss and put the index in the black by nearly 9%. Thus far this year, however, the Moody's Bankrupt Bond Index has not established any trend in returns, said Moody's analyst David Hamilton. Bankrupt debt values have been bouncing around and have not broken out up or down, he said. And bankrupt bonds likely will remain volatile through the rest of the year, he said.

Large telecommunications players buying bankrupt wireless cable companies such as Wireless One Inc. lifted telecom 85% during the month, which fueled the strong overall returns. There is no event on the immediate horizon that will offer similar results, though, Hamilton said. At press time, data on May returns was not available.

Investors are not coming back into the bankrupt debt market in force, Hamilton said. And Moody's does not expect a near-term, major credit event to occur that might bring investor interest to the levels seen in the early 1990s, he said.

Nevertheless, the number of issues in the MBBI is nearing the all-time high of 66, hit in March 1992, and will likely top that record in coming months, he pointed out.

Even though the default rate on junk bonds continues to trend upward, now 3.8% compared to a year-earlier 2.7%, it remains well below 1992 default levels. The increase in the default rate notwithstanding, the historically high number of issues in bankruptcy is attributable to the size of the current high yield market, remarked Hamilton. Defaults in 1992 were broad-based, while today's defaults stemmed from international credit declines or industry specific pressures, he said. - Scott Stuart