When the Federal Reserve slashed short-term rates to a mere 1.75% last December, many market mavens thought Corporate America would start digging out from its debt. No more. With the profit outlook depressed and accounting scandals so rife that even trustworthy borrowers look suspect, new credit problems loom.

A recent surge in debt downgrades has hit bellwether borrowers such as J.P. Morgan Chase & Co. (JPM ) and General Mills Inc.. Now, downgrades are rolling in at last year's heady pace. Rating agencies have roughly 14% of all corporate bond issuers under review for downgrade. Compare that with the mid-1990s, when the norm was 3%. "We could see more companies have trouble refinancing or rolling over their debt in coming quarters," says David T. Hamilton, director of default research at Moody's Investors Service (MCO ).

Nearly half this year's downgrades involved tech, telecom, and energy trading. But market pros foresee credit problems spreading to such debt-heavy businesses as hotels and cable-TV operators, as well as to insurers, whose capital reserves have been hit by heavy claims and big investment losses. On Oct. 16, Standard & Poor's (which like BusinessWeek is owned by the McGraw-Hill Companies) downgraded General Motors Corp. because of its huge and rising pension liabilities. Other old-line manufacturers could follow.

There may also be more trouble ahead for utilities. S&P has issued 149 downgrades on the 320 utility holding companies it rates this year, and it still has a negative outlook on nearly one-third of them. Some analysts believe regulated utilities such as Southern Co. (SO ) and Consolidated Edison Inc. (ED ) are becoming vulnerable. They could be squeezed between rising wholesale costs and state regulators who will resist pressure to raise retail rates. "We're looking at another two to three years of downgrades in the utility industry," predicts Jon Kyle Cartwright, a senior fixed-income analyst for Raymond James & Associates.

A downgrade is no trivial matter. Companies with even the lowest of the four investment-grade ratings--a Baa in Moody's rating system, and a BBB with S&P--can borrow at an average 3.6 percentage points over benchmark Treasury rates--roughly 6.6% for a five-year loan.

But once companies slip into "junk" status, they are in dire straits. With default rates on junk-rated companies' debt above 9%, their average interest rate is 10 percentage points above Treasuries--roughly 13% for that five-year loan. Lenders and the commercial paper market are increasingly leery of junk-rated companies. "It has become more costly than ever to have your credit rating downgraded," notes John Lonski, chief economist at Moody's.

Some borrowers complain that rating agencies have become too quick to downgrade. Others grouse that creditors now treat a downgrade to junk as tantamount to default, rushing to cut their exposure to troubled companies. "A liquidity crisis is a phone call from a ratings agency," Vivendi Universal CEO Jean-Rene Fourtou complained at a recent news conference. Rating agencies say the markets want them to anticipate credit problems sooner. "There's more pressure on rating agencies to act more quickly than we did before," notes David A. Wyss, chief economist at S&P. Low rates notwithstanding, many companies may find money harder and harder to come by.

By Dean Foust in Atlanta

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