Feb. 28 (Bloomberg) -- AbitibiBowater Inc. bonds tumbled after North America's largest newsprint maker reported a fourth- quarter loss and warned it may not be able to refinance $350 million of debt maturing in the second quarter of this year.

AbitibiBowater had a fourth-quarter loss of $250 million, its first reported results since the merger of Montreal-based Abitibi-Consolidated Inc. and Greenville, South Carolina-based Bowater Inc. was completed on Oct. 29. The newsprint company said today it needs to refinance $200 million of 6.95 percent debt due on April 1 and $150 million of 5.25 percent debt due June 20.

Corporate debt defaults are rising as the economy slows and the world's largest financial institutions clamp down on lending after reporting $163 billion in writedowns and losses stemming from the collapse of the subprime-mortgage market. Nine U.S. companies have already defaulted this year, compared with 12 in all of 2007, according to Barclays Capital.

``The capital markets are pretty darn close to being closed right now,'' said Mark Durbiano, who manages $3 billion in high- yield bonds at Federated Investors Inc. in Pittsburgh. ``The banks are obviously having issues and they're not particularly anxious to committing more capital. On the bond front, new issues are in probably the slowest period I've seen and I've been doing this for almost 25 years.''

Sales of high-yield, high-risk bonds have dwindled to $8 billion so far this year, compared with about $23 billion in the same period of 2007, according to data compiled by Bloomberg. High-yield, or junk, bonds are those ranked below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's.

`Warts Show Up'

The default rate will increase to 2.25 percent by year-end from 0.66 percent in January, JPMorgan Chase & Co. said in a Feb. 22 report. The rate may rise as high as 7 percent next year if the U.S. economy enters a recession, JPMorgan predicts.

``The economy is weaker and the warts show up a little more when that happens,'' Durbiano said. For ``the newsprint companies, consumption has been falling for quite a number of years and they've been taking capacity out but the business isn't showing any signs of getting better.''

Demand for newsprint fell 12 percent in December from a year earlier, extending a multiyear decline linked to the rising popularity of high-speed Internet services and other electronic media, according to the Pulp & Paper Products Council.

Bonds Tumble

``Continued negative conditions in the credit and capital markets, as well as the difficult industry operating environment, are challenging'' AbitibiBowater's ability to refinance its debt, the company said in a statement today. ``There can be no assurance that either the company, Abitibi-Consolidated or Bowater could obtain such financing on terms satisfactory to the company.''

AbitibiBowater's $250 million of 8.5 percent bonds due in 2029 fell 2.5 cents to 50.75 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 17.2 percent, or 1,271 basis points more than similar-maturity Treasuries, Trace data show.

Securities that trade at a spread of 1,000 basis points or more are considered ``distressed,'' indicating investors are concerned that the company will default. A basis point is 0.01 percentage point. AbitibiBowater's bonds are rated B3 by Moody's and B by S&P.

Credit-Default Swaps

Credit-default swaps tied to AbitibiBowater, which has about $4.8 billion of bonds outstanding, also soared further into distressed levels. Sellers of the contracts are demanding 44 percent upfront and 5 percent a year to protect the company's bonds from default for five years, according to broker Phoenix Partners Group in New York. That's up from 39 percent upfront yesterday, CMA Datavision prices show, and means it would cost $4.4 million initially and $500,000 a year to protect $10 million of the company's debt from defaulting.

The credit-default swap price implies that investors see a 92 percent chance that the company won't be able to pay its debt before the contracts expire, according to a JPMorgan valuation model. That's based on an assumption bondholders would be able to recover 40 percent of their value in a bankruptcy.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A drop shows improvement in the perception of credit quality; an increase, the opposite.

To contact the reporter on this story: Caroline Salas in New York at csalas1@bloomberg.net

Last Updated: February 28, 2008 17:18 EST