Risk Management, PRMIA

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February 16, 2007

Frontiers in Credit Forum: Professor Edward I. Altman Issues Caution on Credit

February 16, 2007 – New York, NY – Edward I. Altman, Max L. Heine Professor of Finance at New York University’s Stern School of Business, today presented at PRMIA’s Frontiers in Credit Forum his latest forecasts on default rates for corporate high-yield non-investment grade bonds.

Using his model based on mortality rates, Professor Altman forecasts a default rate of 2.5% in 2007 and 3.7% in 2008. While higher than the current rate of 0.76%, these default forecasts are well below the historical average of 4.2%. Leveraged loans are also currently exhibiting similarly low historic rates of default.

Professor Altman points out that this is the lowest default rate in 25 years on corporate high-yield non-investment grade bonds, and the highest recovery rate ever. He attributes this to the unusually high volume of liquidity chasing few defaults.

Today’s average loan in default sells at $0.93 on the dollar, an amount very close to that of the average on new defaults. Driving these trends are an estimated 170 managers of distressed debt in the U.S. alone.

While Professor Altman is not necessarily forecasting a drying up of liquidity, he does caution that corporate fundamentals and poor new bond and loan quality point toward significantly higher default rates in the future.

The PRMIA Frontiers in Credit Forum is the first of four events in this year’s PRMIA New York Conference Series.

Posted by dkoenig at February 16, 2007 02:42 PM

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