Aug. 4 (Bloomberg) -- WCI Communities Inc., the homebuilder chaired by billionaire Carl Icahn, and department-store chain Boscov's Inc. filed for bankruptcy as company defaults escalated amid concern the U.S. is teetering on the brink of a recession.

The U.S. default rate at the end of June was 2.4 percent, a figure that will probably rise to 5.4 percent by December and 6.1 percent through June next year, Moody's Investors Service said last month. By the second quarter, 35 companies had failed to repay their high-yield, high-risk debt, more than in the whole of 2007, New York-based Moody's said.

U.S. companies that depend on a robust housing market and consumer spending are hurting as consumers, concerned about their jobs and watching their homes lose value, rein in spending. Near- record oil prices are translating into fewer trips to shopping malls and less spending once there, as well as better sales at discounters such as Wal-Mart Stores Inc. and Costco Wholesale Corp.

``These are in sectors that are clearly good leading indicators of the overall default rate,'' said Martin Fridson, chief executive officer of Fridson Investment Advisors in New York. ``The big question now is to what extent the pain will spread into wider industrial credits.''

Merrill Lynch & Co.'s U.S. High-Yield Distressed Index comprised 450 debt issues with a total face value of $217 billion as of Aug. 1, 22 percent of the value of the benchmark U.S. High- Yield Master II Index. A year ago, there were 53 issues in the distressed index with a value of $13.8 billion, accounting for 1.5 percent of the wider speculative-grade index.

Default Outlook

The percentage of high-yield, or junk, bonds trading at distressed levels suggests that 7.2 percent of speculative-grade issuers will default over the next 12 months, according to a July 31 report by Fridson. He predicted defaults on speculative-grade bonds will climb as high as 10.9 percent, peaking in the first half of 2010.

The cost to protect junk bonds from default rose to the highest in a month, a benchmark credit-default swap index shows.

The price of credit-default swaps on the Markit CDX high- yield index fell 0.625 percentage point to 92.5 as of 4:49 p.m. in New York, according to Barclays Capital. That means the annual cost to protect $10 million of non-investment grade bonds from default for five years jumped about $19,600 to $718,600, Bloomberg data show. The cost is the highest since July 7, according to CMA Datavision.

Razor-Thin

``Companies at the lowest end of the ratings scale have a razor-thin margin for error and these were clearly in the weaker sectors,'' Standard & Poor's analyst Diane Vazza in New York said in a telephone interview. Moody's had assigned WCI a corporate family rating of Caa3, the third-lowest junk status, while Boscov's was unrated.

Vazza estimated the default rate may reach 8.5 percent within a year, more than double the long-term average of 4.4 percent. High-yield, speculative-grade, or junk, bonds are rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's.

``Companies had pushed off their reckonings but now this is the seventh consecutive month of defaults ticking up,'' Vazza said. The speculative-grade default rate is climbing up from a 25 year low of 0.97 percent reached in December 2007, S&P data show.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on the ability of companies to repay their debt. They were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities or the cash equivalent should the company fail to adhere to its debt agreements.

Job Cuts

As defaults rise investors are shying away from both junk and investment-grade debt, according to JPMorgan Chase & Co. data. High-yield bonds lost 1.34 percent in July and investment- grade debt shed 1 percent, compared with a 0.52 percent gain for the 10-year U.S. Treasury note, JPMorgan data show.

A private report today showed planned job cuts by U.S. employers soared last month. Firing announcements increased to 103,312 last month, up 141 percent from 42,897 in July 2007, Chicago-based Challenger, Gray & Christmas Inc. said. It was the biggest year-on-year percentage increase since November 2001, at the end of the last official recession, Challenger said.

Chapter 11

WCI filed for Chapter 11 bankruptcy protection in Wilmington, Delaware, today after failing to obtain new financing and losing 90 percent of its value in the past year. WCI, which began developing master-planned communities in 1946, joins at least a dozen homebuilders that have sought bankruptcy protection since June 2007 as the worst housing slump since the Great Depression has battered sales.

Existing home sales in Florida, WCI's biggest market, fell 5 percent in June to 11,700 and the median price tumbled 16 percent to $205,500, the Florida Association of Realtors said on July 24.

Boscov's, the 9,500-employee department-store chain founded in 1911 in Reading, Pennsylvania, also filed for protection in Wilmington today.

The collapse of the housing market and increased food and energy costs have led to ``a decline in the discretionary spending by consumers upon which the debtors' business depends,'' Michael Hughes, Boscov's executive vice president of capital development, said in court papers. The company has stores in six states, mostly in Pennsylvania.

The case is In Re Boscov's Inc., 08-11637, U.S. Bankruptcy Court, District of Delaware (Wilmington).

WCI's case is WCI Communities Inc., 08-11643, U.S. Bankruptcy Court, District of Delaware (Wilmington).

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net; Rob Copeland in New York at rcopeland@bloomberg.net

Last Updated: August 4, 2008 17:53 EDT