Jan. 3 (Bloomberg) -- Buffets Inc., the largest operator of buffet-style restaurants in the U.S., failed to make a coupon payment on $293 million of debt, sending the bond prices plunging to a record low.

Buffets, a closely held company based in Eagan, Minnesota, didn't pay interest yesterday on its 12.5 percent notes maturing in 2014, according to Matthew Lee, a customer service representative at U.S. Bank National Association in St. Paul, Minnesota, the trustee for the debt.

The missed payment sparked concerns that corporate defaults are starting to escalate as the worst home sales market since 1981 slows the economy. Tousa Inc., the Florida homebuilder that lost 99 percent of its market value in the past year, also missed interest obligations on $485 million in debt, the company said in a regulatory filing yesterday.

``Default rates are going to start to increase'' this year, said Katalin Kutasi, a principal and the investment manager for distressed debt at hedge fund Kellner DiLeo & Co. in New York, which manages $300 million. ``A lot of them are going to be consumer-sensitive companies.''

The 12 month dollar-weighted high-yield default rate will rise to 2.25 percent by the end of this year from 0.34 percent in December, JPMorgan Chase & Co. high-yield strategist Peter Acciavatti in New York predicted in a report dated yesterday. The rate will climb to 4 percent by year-end 2009, he forecast.

Bond Prices Fall

Buffets's 2014 notes fell as much as 10.5 cents to a record low of 29.5 cents on the dollar to yield 48.7 percent, or 4,535 basis points more than similar-maturity Treasuries, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. Debt that trades at a spread of 1,000 basis points or more is considered ``distressed,'' indicating investor concern about default. A basis point is 0.01 percentage point.

Keith Wall, chief financial officer of Buffets, didn't immediately return a phone call seeking comment. Buffets is owned by private equity firm Caxton-Iseman Capital LLC in New York.

The company operates more than 600 restaurants under a variety of names including Old Country Buffet, Ryan's, Fire Mountain and Tahoe Joe's Famous Steakhouse.

Bon-Ton, Rite-Aid

Bonds of other high-yield companies, such as department store chain Bon-Ton Stores Inc. and drug-store Rite-Aid Corp., also fell today on ``recognition that things aren't going to be getting better any time soon,'' Kutasi said. MAAX Corp., the Canadian bathroom-fixture maker, also missed a Dec. 15 interest payment on its $150 million of 9.75 percent notes due in 2012, the Montreal- based firm said in a Dec. 18 statement on its Web site.

York, Pennsylvania-based Bon-Ton's $509 million of 10.25 percent debt due in 2014 fell about 2 cents to 73 cents to yield 17.6 percent, or 1,432 basis points more than Treasuries, Trace data show. Bon-Ton had a loss in six of the past seven quarters.

Rite-Aid, the third-largest U.S. drugstore company, said today that same-store sales fell 0.5 percent last month, the biggest decline since April 2005. Camp Hill, Pennsylvania-based Rite-Aid's $410 million of 9.375 percent notes due in 2015 tumbled 3.5 cents to 77.75 cents, Trace data show. The debt yields 13.8 percent, a spread of 987 basis points over Treasuries, according to Trace.

Buffets Ratings Cut

Buffets's loss in the quarter ended Sept. 19 widened to $5.3 million from $1.1 million a year ago, the company reported in November. The leverage requirement for its bank loans tightened on Sept. 20, forcing it to maintain a ratio of debt to earnings before interest, taxes, depreciation and amortization of less than 5.75 times, down from six, according to Standard & Poor's.

S&P lowered Buffets's credit rating one level in November to CCC, suggesting potential default, saying the restaurant operator was likely to breach the covenant as the company had a leverage ratio of 5.98 times in September. The 2014 securities are rated Caa3 by Moody's Investors Service and CC by S&P, the third and second-lowest speculative-grade ratings above default.

Shares of Escondido, California-based retail property owner Realty Income Corp., which counts Buffets as its largest tenant, fell 58 cents to $24.65 in New York Stock Exchange composite trading, the lowest since August. Citigroup Inc. analyst Jonathan Lit yesterday advised selling Realty stock because Buffets is close to breaching debt covenants and may file for bankruptcy.

Tousa, which said in a regulatory filing in November that it has $1.7 billion in debt, is considering a restructuring that may include a bankruptcy filing. Tousa's $200 million of 9 percent debt due in 2010 rose 4 cents to 46.75 cents and yields 48 percent, or 4,466 basis points more than Treasuries, according to Trace. The securities are rated C by Moody's and S&P.

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

Last Updated: January 3, 2008 16:14 EST