The end is not near for the distressed debt cycle, as many middle-market U.S. companies will still have to be restructured because of debt taken on during the credit boom, fund manager PIMCO said on Wednesday.

While the default rate is falling on junk bonds, it is still rising for leveraged loans to middle-market companies, PIMCO portfolio managers Stephen Moyer and Michael Watchorn said in a report posted on the company's website.

Since November, the default rate on leveraged loans to middle-market companies has risen to about 12 percent from 10 percent, according to PIMCO data, which is based on the dollar volume of bonds defaulting.

The dollar-weighted default rate on U.S. junk bonds has fallen to 9 percent from a peak of about 20 percent in November, according to Moody's Investors Service.

While many believe the distressed cycle is over, given the rally in the high-yield bond and leveraged loan markets, our research suggests the middle market remains particularly challenged, the PIMCO report said.

Many companies counted on continued economic growth to help them sustain extraordinary debt burdens taken on during the credit boom, PIMCO said.

A slower pace of economic growth following the recession will pose a challenge to these companies and their creditors, the fund managers said.

Many have been bailed out by an accommodative monetary policy that has kept short-term interest rates at near-historical lows and thus reduced interest burdens during a period of declining operating cash flow, the report said.

However, these stretched balance sheets are inherently unsustainable in the New Normal, PIMCO said, referring to a period of slower growth it expects following the last recession.

SOME WILL MISS REFINANCING BOAT

Fueled in part by indiscriminate buying by collateralized loan and debt obligations, debt issuance in the high-yield bond and leveraged loan markets exceeded $1 trillion in 2006 and 2007 alone, PIMCO said.

Middle-market companies now have about $200 billion of debt coming due through 2014, and refinancing will not be available to all, the report said.

Even if a company is successful in accessing the high-yield market, it is often a stop-gap measure, the report said. Many companies are refinancing loans by issuing bonds, but they are paying higher interest costs and postponing their debt problems, the report said.

Eventually, many will need to restructure their balance sheets, providing more opportunities for distressed debt investors, the report said.

Data on Wednesday confirmed that the amount of distressed debt in the market is rising as sovereign debt troubles in Europe trigger a sell-off of riskier debt.

The amount of debt trading at distressed levels, or with yields at least 10 percentage points higher than those on Treasuries, rose to $56 billion in May from $32 billion in April, Standard & Poor's said in a report.

About 9.4 percent of U.S. junk bonds in May were trading at distressed levels, up from 6.7 percent in April, S&P said.

(Reporting by Dena Aubin; Editing by Jan Paschal)