Junk Bonds Appear to Be Stabilizing : Finances: The default rates on the risky securities are tapering off, analysts are beginning to note.

NEW YORK —  Junk-bond observers are growing more confident that the market’s staggering default rates are in the past and more stable times are ahead for the risky securities.

Missed interest and principal payments will still be a part of life for many who buy the bonds, but the days of doubling annual default rates appear to be gone.

Downgrades to the brink of default have tapered this year, says Moody’s Investors Service Inc., a major bond-rating agency. The Bond Investors Assn. has lowered its projections of bond defaults to $24 billion for 1991, which would mark the first time since 1987 there hasn’t been a year-to-year increase.

“We’re passed the peak, I’m pretty sure, unless the recession gets a lot worse,” said C. Richard Lehmann, president of the association, which tracks bond defaults.

Junk, or high-yield, bonds are a way for companies to borrow when their steep debt and precarious finances make rating agencies and investors wary about their ability to repay the money. The bonds are also known for the high interest rates they offer investors in exchange for increased risk.

They became one of the most visible corporate borrowing tools in the 1980s, popularized largely by now-defunct Drexel Burnham Lambert Inc. and its former chief bond trader, Michael Milken.

Junk bond defaults started their steep climb in 1989, when they rose to $12 billion from the $5 billion recorded in 1988, BIA figures show. The number doubled again in 1991, rising to $24 billion.

Lehmann said the best investors can hope for would be an eventual return to the $4-billion annual default rates that were the norm before the junk-bond boom went bust.

“I think the really bad stuff went really fast, helped by the recession and Drexel’s collapse,” Lehmann said.

The recession made it more difficult for companies to come up with the required interest and principal payments on the bonds. Also, when Milken was dominating the junk market, he could quickly avoid an issuer’s default simply by issuing new bonds to pay off the troubled ones.

The market this year has been marked by a general improvement in the quality of junk bonds, with the upper tier dominating the speculative category.

Of the junk bonds not in default, 42.6% were on the edge of the respectability of an investment-grade rating at the end of the third quarter, Moody’s said. At the end of 1989, as default rates were soaring, only 26.8% of the non-default junk bonds were at the top speculative-grade rating.

That top drawer of junk bonds has former investment-grade companies that got in trouble during the recession and junk-bond issuers who cleaned up their balance sheets and were rewarded with an upgrade, Moody’s said.

Perhaps most significant, the new junk bond issues have largely been of stronger credit quality, landing ratings at the top of the speculative class.

“People today are looking at quality, underwriters aren’t willing to consider the kinds of deals (Milken) put out,” Lehmann said.

The new bonds put their buyers closer to the front of the line to collect if the company encounters financial trouble. Some issuers are securing the debt with company assets.

Many of the companies issuing new junk bonds are using the money to whittle away at the huge debt and interest payments they took on in the 1980s, improving their balance sheets.

Some are taking advantage of the strong stock market to issue new equity and use the proceeds to retire costly debt.