Nov. 12 (Bloomberg) -- Moody's Investors Service increased its forecast for global corporate defaults to more than 10 percent within the next 12 months, citing the likelihood of a ``deep and protracted'' recession in the U.S.

Just a month ago, Moody's was predicting the high-yield default rate would be 7.9 percent in the next year. U.S. speculative-grade defaults will surge threefold to 11.4 percent in the next 12 months, and in Europe the rate will jump almost 10-fold to 9.7 percent, Moody's said in a statement today.

Rising unemployment and a housing slump entering a fourth year is causing consumers to retrench. More than a dozen retailers have filed for bankruptcy in the past year, including Circuit City Stores Inc. and Linens 'n Things; General Motors Corp. has said it may not have enough cash to keep operating this year; and CreditSights Inc. this week said companies considering bankruptcy may even have trouble finding debtor-in-possession financing, which would hurt recovery rates for investors.

``We could easily see corporate speculative-grade default rates surpass the levels we've seen in the past two recessions,'' Kenneth Emery, Moody's director of corporate default research, said in an interview. ``Given this credit environment, there really are no options for refinancing.''

The market is implying a default rate of as much as 18 percent over the next 12 months, which would be higher than during the Great Depression, Martin Fridson, chief executive officer of investment firm Fridson Investment Advisors in New York, said in an interview with Bloomberg Television today.

``The market actually does a very good job of forecasting the default rate in most periods,'' Fridson said.

Yield Spreads

More than $900 billion of writedowns and credit losses by banks worldwide since January 2007 have caused markets to seize up as lenders hoard capital, making it hard for companies to refinance debt. The high-yield bond market in Europe is effectively shut, while U.S. borrowers have raised $13.4 billion since June, the lowest since at least 1999, data compiled by Bloomberg show.

High-risk, high-yield debt is rated below Baa3 by Moody's and BBB- by Standard & Poor's.

Yields on U.S. junk bonds have doubled relative to benchmark rates since Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15, forcing companies to pay the highest borrowing costs in at least 22 years to sell debt, according to Merrill Lynch & Co.'s U.S. High Yield Master II index.

Spreads widened to a record 16.81 percentage points on Oct. 27 for a yield of 19.49 percent. Average spreads reached a record low of 2.41 percentage points 17 months ago.

Just based on high-yield bond spreads and their historical relationship to defaults, ``you would be forecasting default rates at all time highs since the Great Depression,'' Emery said.

MGM Mirage, Aleris

MGM Mirage, the casino company majority-owned by Kirk Kerkorian, raised $750 million last month by offering to pay a record yield of 15 percent, the only speculative-grade sale in October, Bloomberg data show. On Sept. 24, restaurant company Perkins & Marie Callender's Inc. paid 15.75 percent to sell $132 million of notes due in May 2013.

Aleris International Inc. today became the 15th company with so-called toggle bonds or loans to make an interest payment with more debt rather than cash as financing options dwindle and concern grows that the U.S. is headed for the longest slump in three decades. Companies have paid in kind on at least $10.3 billion of debt, usually at a cost of an extra 0.75 percentage point in interest.

Making the June interest payment on its 9 percent notes due in 2014 will save $27 million in cash, Aleris Chief Financial Officer Kevin Brown said today during a conference call with analysts.

Economic Contraction

The implosion of credit markets last month will cause the economy to shrink at a 3 percent annual rate in the fourth quarter and decline at a 1.5 percent pace in the first three months of 2009, according to the median estimate of 59 economists surveyed Nov. 3 to Nov. 11 by Bloomberg. Following last quarter's 0.3 percent drop, the slump would be the longest since 1974-75.

The global high-yield default rate will increase to 10.4 percent by October 2009, a more than threefold increase from 2.8 percent last month, Moody's said. The rate will rise to 4.3 percent by December.

Moody's increased the default forecast mostly because of a jump in yield spreads and a higher-than-expected unemployment rate, Emery said. The U.S. jobless rate rose to a 14-year high of 6.5 percent in October from 6.1 percent the previous month, the Labor Department reported last week.

Default Rates

In the U.S., the rate will reach 4.9 percent by year-end, up from 3.3 percent in October and 3.1 percent in September. In Europe, 2.2 percent of borrowers will miss payments on obligations by year-end from 1 percent in October.

Ten companies rated by Moody's defaulted in October, including Iceland's three largest lenders, Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Banki hf. Three U.S. companies missed debt payments, while companies in the U.K., Mexico, Japan and Hong Kong defaulted, Moody's said.

The ratings firm expects the consumer transportation industry to be hardest hit in the U.S. while in Europe the durable consumer goods industry will have the most defaults.

To contact the reporters on this story: John Glover in London at johnglover@bloomberg.net; Bryan Keogh in New York at bkeogh4@bloomberg.net

Last Updated: November 12, 2008 17:11 EST