Credit crisis sends businesses into junk bond limbo

— -- The credit crisis is serving up a double-whammy to struggling companies that could make it even harder for some to recover.

Not only are a rising number of companies facing the possibility of seeing their credit downgraded to junk, but they're falling from grace at a time when it's never been more expensive to have junk bonds. That means companies already hurting in a weak economy may suffer again in the credit markets if they need cash to get them through.

"If these companies need to come to market … they are going to have a problem," says Dave Novosel, analyst at bond analysis firm Gimme Credit.

This point of stress on companies is poised to be a real issue for a number of reasons such as the:

•Surging number of "fallen angels." So far this year, 33 companies around the world with debt of $194.4 billion have had their credit ratings cut from investment grade to junk levels, says Diane Vazza of Standard & Poor's, based on the most recent data as of Oct. 14. The debt held by this year's fallen angels already is 44% greater than that held by all fallen angels in all of 2007.

There are likely more to come: 47 companies with $117.0 billion in debt have the potential to be downgraded, S&P says.

•Prohibitive borrowing costs for borrowers, especially junk bond issuers. Borrowing costs for nearly all types of companies have soared to record levels, but the pain has been especially bad for junk issuers.

Currently, yields on junk bonds are 16.2 percentage points above equivalent U.S. Treasuries, which is up from 5.92 percentage points at the end of 2007 and 2.89 percentage points at the end of 2006, says Merrill Lynch. That explosion in yield has been much less tame for investment-grade issuers, as the yields are 6.06 percentage points above Treasuries, up from 2.03 percentage points at the end of 2007.

•Longer downturn. As the government's actions begin to sink in and credit markets heal, junk bond markets will be the last to recover, Novosel says. "If the window opens a little, some higher-rated deals will get done," leaving lower-rated companies unable to borrow and at an even greater disadvantage, he says. Higher rates only sting if companies need to borrow.

But the credit double-whammy raises the stakes and requires companies to not make a single mistake that consumes cash, says Roger Lister at credit-research firm DBRS. "For those that fall off the wagon … this is a very tough time to cope," he says.