Altman Expects Low Default Rate to Continue Barring Overseas Disaste...

U.S. companies will continue defaulting near their current low rates barring a major crisis overseas, a bankruptcy expert said in his 13th annual address to restructuring professionals on Monday.

In his annual speech put on by the New York chapter of the Turnaround Management Association, New York University professor Edward I. Altman said he expects only a 2.03% default rate for U.S. corporate bonds in 2014, but an implosion in another country could change that number dramatically.

“The probabilities of that happening are not trivial,” said Mr. Altman, the Max L. Heine professor of finance at NYU and inventor of the Z-score formula for predicting bankruptcy. While his prediction would mark a doubling of the 2013 rate, the rate is still well below historical lows.

Mr. Altman said his research shows the possibility of sovereign debt troubles in several countries, including Portugal, Spain and more recently, Brazil. When looking at the default probabilities of a country’s sovereign debt, he also looks at what’s happening to its private sector companies, which can be an indicator of wider problems. Just a few years ago, Brazil’s default probability was around 10% but that number grew to near 25% by the end of 2013.

A default there could “cause problems all over the world, including here,” Mr. Altman said at the Union League Club in Midtown Manhattan.

In the U.S., Mr. Altman joked about the fact that he overestimated the default rate for 2013 in last year’s presentation. He said that wasn’t his fault. He would have been much closer if Energy Future Holdings Corp., formerly TXU Energy, filed for Chapter 11 during the year instead of making a $270 million interest payment to keep itself—at least temporarily—out of bankruptcy. Just those bonds defaulting would have brought the 1.044% default rate up to 2.3%, he said.

Mr. Altman found that of the hundreds of companies that filed for Chapter 11 between 1981 and 2013, 71% of them had “successful” restructurings when factoring in the companies who had to file again later. “Successful” was defined as a company that reorganized and stayed in business or sold itself through a bankruptcy sale, while “unsuccessful” was defined as liquidating through a Chapter 11 or converting to Chapter 7.

“The U.S. bankruptcy system is not broken,” Mr. Altman said.

Write to Joseph Checkler at [email protected]. Follow him on Twitter at @JoeCheckler.