Fitch: Trailing 12 Month U.S. Default Rate Down Again in May, Refinancing a Boon for HY Issuers.

Business Editors

NEW YORK--(BUSINESS WIRE)--June 19, 2003

The trailing twelve month U.S. high yield default rate was down for the fifth consecutive month in May, falling to 11.8% from 13.5% in April and 16.4% at year-end 2002. Thirteen issuers defaulted on their bond obligations in May, the largest AMERCO, the parent holding company of truck leasing company, UHAUL. The year to date default tally, including May's $3.2 billion, reached $15.6 billion, down 66% from the $46.1 billion recorded in the first five months of 2002. The defaulted issuer count through May totaled 47, down 50% from a count of 93 for the comparable period in 2002. The trailing twelve month default rate excluding fallen angels also fell to 7.3% in May, from 8.9% in April and 12.4% at year-end 2002.

The weighted average recovery rate (the par weighted average trading price of defaulted issues 30 days after default) has also improved relative to 2002 levels, ending May at 33% of par compared with 22% of par for full year 2002. On a mark-to-market basis, losses on defaults have contracted in 2003. The weighted average trading price of 2003 defaulted issues at the beginning of the year was 43% of par, for an incremental loss upon default of 10% of par. In 2002, the incremental loss of par value as a result of default was closer to 20% of par. This means that defaults this year, in addition to being lower overall, have also had less of a bite on investor returns.

High yield new issuance has been on a tear this year supported by strong demand for yield product and, happily for high yield companies, accompanied by contracting risk premiums. New issuance totaled $66 billion in the first five months of the year, well ahead of the $55 billion sold in the first five months of 2002. The bulk of new bonds were used to refinance existing debt at lower interest rates. In fact, the median coupon of high yield bonds sold in the first five months of 2003 was 8.9% compared with 9.5% for bonds sold in the first five months of 2002, despite a similar rating mix for the two periods. The strength of the primary market for speculative grade bonds is certainly working in favor of high yield companies by enabling them to reduce the cost of carry on high levels of debt while waiting for revenue and cash flow to rebound. The refinancing boom has changed the market's profile in another meaningful way.

At the end of May, nearly 50% of the U.S. high yield market consisted of bonds sold beginning in 2001 through 2003. The concentration of bonds issued in the troublesome years of 1997-1999 has declined to just 33% of outstanding issues, from 51% at the end of 2001 and 61% at the end of 2000. Offsetting this is the reality that the rating mix of bonds sold in the past year and a half has also been aggressive, mostly concentrated in B credits. But the recent new issue mix should prove less risky than the 1997-1999 pool by one important measure - it lacks the deep concentration in the emerging telecom sector, the primary reason for the dismal default performance of the 1997-1999 bond sales.

Overview of the Fitch U.S. High Yield Default Index

Fitch's default index is based on the U.S., dollar denominated, non-convertible, speculative grade bond market (the rating equivalent of 'BB+' and below, rated by Fitch or one of the two other major rating agencies). Fitch includes rated and non-rated, public bonds and private placements with 144A registration rights. Defaults include missed coupon or principal payments, bankruptcy, or distressed exchanges. Default rates are calculated by dividing the volume of defaulted debt by the average principal volume outstanding for the period under observation.

Fitch's high yield default studies are available on the Fitch Ratings web site at 'www.fitchratings.com'.