Defaults and Returns on High Yield Bonds : Analysis Through September 30, 2002

The third-quarter 2002 default rate for high yield bonds was 4.95%, based on $37.48 billion of defaults. The quarterly default rate is the highest in history, surpassing the first quarter of 1991 rate of 4.80%. One massive default, WorldCom, accounted for $28.30 billion of defaults (76%). Without WorldCom, the third quarter default rate would have only been 1.2%. The dollar weighted default rate for the first three quarters has already broken the record for a single calendar year reaching 10.98%. And, the latest four-quarters default rate of 15.01% has also set a record. Again, WorldCom s huge default contributed about 4% of this record total. The persistently high default rate through the third quarter has resulted in a near record yield spread of 10.10% -- second only to 1990 s 10.50%. The current yield spread is more than 5% above the historical average. We believe the default rate has peaked in Q3-2002 and depending on the size of the decline, we believe the huge yield spread could reflect an over-sold market. Counting WorldCom ($46.0 billion in liabilities), there were more than $197 billion in liabilities of firms which filed for Chapter 11 protection through the third quarter and 26 firms had liabilities greater than $1 billion. The count was 22 firms through the first-half of the year, so the third-quarter number was quot;onlyquot; four, including WorldCom. There were 39 of such firms in 2001 - - a record year