LOS ANGELES, Oct 15: Fears of rising defaults amid Sept 11 terrorist attacks have slowed down United States’ corporate loan demand as well as corporate lending, indicated by last week’s Standard & Poors’ new index of 500 key non-investment grade loans.

The S&P report said that overall return on loans fell by 1.52 per cent during September, the biggest such decline since 1997 when S&P actually started storing data on the investment performance of loans.

Banks and other investors are worried that corporations will increasingly find themselves unable to repay their debts.

“There is a fear that default risk is now higher as a result of the attack,” says Steve Miller, managing director of S&P’s PMD unit, which published the index. S&P itself is a unit of McGraw-Hill Co.

Though the S&P says the return on loans is still better as compared with bonds and stocks because loans are secured or backed by collaterals, the attacks came at a time when the economy was already slowing in which bad loans were already on the rise.

In some industries, like technology, the delinquencies already rising to “crisis levels,” the report said.

The S&P Index shows the investors now see the loan market as only getting worse, a gloomy outlook supported by everything from a surge in downgrades to government warnings about deteriorating loan quality.

It is also unclear what will be the long-term impact of ongoing US air strikes in Afghanistan.

On the other hand, Moody’s Investors Services said on Friday that it downgraded in the first 9-month of 2001 five times as many borrowers as it upgraded - indicating the most negative ratio since loan ratings were initiated in 1995.

Meanwhile, loans classified during May and June 2001 as bad stood at $117 billion or 5.7 per cent of the total, up from 3.2 per cent against 2000.

According to Loan Pricing Corporation, which monitors prices in the loan market, the average loan price of leveraged loan to hotels and gambling companies for example climbed 1.1 per cent from July 1 to Sept 10 and dropped 4.7 per cent from Sept 11 to Sept 28, the data showed.

Similarly, loans to construction companies rose 0.9 per cent prior to attacks then dropped 2.7 per cent. Real-investment loans fell by 3.7 per cent and loans to technology companies dropped 3.3 per cent.