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Fitch: U.S. Default Rate Stalls But Critical Macro Issues Linger

Posted by | October 23, 2012 .

NEW YORK–(BUSINESS WIRE)–Near-term default pressures appear to be easing as 2012 draws to a
close, allowing the possibility that the U.S. high yield default rate
may end the year below Fitch’s 2012 forecast of 2.5%-3.0%. We believe
the Fed’s efforts to revive the economy and a positive resolution to the
U.S. fiscal cliff remain critical even as the insatiable demand for
yield products is allowing more highly levered companies to access the
debt markets.

“Fitch U.S. High Yield
Default Insight – September 2012”

The trailing 12-month default rate slipped back to 2% in September from
2.2% in August. Two defaults in September brought the year’s issuer
count to 25 and volume tally to $13.4 billion (versus 12 issuers and
$7.9 billion in the first nine months of 2011).

Following a strong August, issuance soared in September and was notable
both in terms of volume and composition. The share of newly minted bonds
rated ‘CCC’ or lower climbed to 26% of total volume ($38.6 billion) — a
record for the year — as the Federal Reserve’s launch of QE3 further
stimulated investor appetite for high yield in the primary and secondary
markets. At the end of September, 46% of ‘CCC’ rated volume in Fitch’s
U.S. High Yield Default Index was trading above par, compared with just
9% a year earlier.

If default volume in the last quarter of 2012 matches 2011′s
considerable $8 billion, the default rate will end the year at roughly
2%. A filing by Edison Mission Energy (IDR rated ‘CC’ by Fitch and one
of the large potential defaults for year-end) would contribute half that
amount, but with funding conditions so robust, it may be difficult to
arrive at the full tally needed to move the default rate beyond 2%.

Booming issuance notwithstanding, fundamentals show that credit gains
have slowed this year — not surprising given the economy’s sluggish
performance — and the bottom tier of speculative-grade issues has
expanded. The ‘CCC’ or lower pool has grown to $227.3 billion from
$196.8 billion at the beginning of the year (including ‘B-’ issues, this
high risk slice of the market now totals $358.9 billion).

The weighted average recovery rate on defaults through September was
49.5% of par, boosted by the 53% of defaulted volume that consisted of
secured bonds. The average recovery rate on senior secured bonds of 65%
of par was more than twice the recovery rate on unsecured issues of
30.8%.

Industry-specific recovery rates showed even more of a gap, ranging from
80% of par to the mid-teens.

For additional details, see Fitch Research on “Fitch U.S. High Yield
Default Insight – September 2012,” available at www.fitchratings.com.

Additional information is available at www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research:
Fitch U.S. High Yield
Default Insight — September 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=691395

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