Fitch Ratings: U.S. High Yield Defaults Contract to 2% Run Rate.

Business Editors

NEW YORK--(BUSINESS WIRE)--April 7, 2004

The U.S. high yield default rate appears to be well on its way to posting the lowest annual level in four years and perhaps longer. High yield defaults totaled just under $4 billion in the first quarter of the year, for a year-to-date default rate of .6%. The quarter's default tally translates into an annualized full year default rate of 2.4%, a level not seen since 1998. In fact, defaults totaled just $7.4 billion over the six month period ending in March, down nearly 70% from the previous six month count. Fourteen issuers defaulted on their bond obligations in the first-quarter 2004 (1Q'04), down from an average of 25 per quarter in 2003 and approximately 41 per quarter in 2002. The trailing twelve month default rate which ended 2003 at 5% was down to 4.6% at the end of March.

High yield companies continued to find a highly welcoming funding environment in the early part of this year. New bond sales boomed and approximately 18% (based on par value) consisted of bonds rated 'CCC' or lower, the largest concentration in recent years, and nearly matching the proportion of bonds rated 'CCC' or lower within the larger universe of outstanding U.S. high yield bonds. While the aggressive rating mix of the newly minted bonds might appear troubling on the surface it is important to note that the opportunity to refinance/restructure debt has in fact depressed default rates for these high risk issuers and has bought these companies critical time in anticipation of the economic bounce currently underway. With the domestic economy showing some very favorable trends, including increases in business spending, improved manufacturing activity and the recent uptick in employment, there is ample reason to believe that credit quality will strengthen this year, deepening some improvements visible in 2003 as described below.

An examination of revenue and debt for a sample of 270 high yield issuers (consisting of 115 companies rated 'BB', 133 rated 'B' and 22 rated 'CCC' or lower; together these represented a third of the U.S. high yield market's par value at the end of March) revealed a growing number of companies reporting increases in revenue and decreases in debt relative to comparable prior year quarters in 2003. For example, in the last quarter of the year, 75% of the companies in the Fitch sample posted increases in revenue relative to 4Q'02. This was up from 69% showing such an improvement in 3Q'03 relative to 3Q'02 and 64% in 2Q'03 relative to 2Q'02. The trend extended to debt but was less pronounced and somewhat choppy.

In the last quarter of the year, 56% of the companies in the sample showed a contraction in total debt relative to 4Q'02. This was up from 52% showing a contraction in the 3Q'03 vs 3Q'02 and 54% showing a contraction in the 2Q'03 relative to the 2Q'02. It is worth noting that at the end 2003 total debt for the sample as a whole was still nearly 9% higher than total debt at the end of 2000 while full year revenue was up 4.8% compared with 2000. This might explain why upgrades have been elusive thus far for high yield issuers - key indicators did begin to move in the right direction in 2003 (for the sample, debt levels, in particular, were down nearly 10% at the end of 2003 from their 2002 peak) but further progress is clearly needed to bring down leverage and spur upgrades. Nonetheless, assuming that improvements in profitability and leverage will continue this year and with capital freely available, Fitch believes defaults will remain low for the remainder of the year.

After returning to levels more consistent with historical norms in 2003, recovery rates continued to rise in the first quarter of 2004. The quarter's weighted average recovery rate was 53% of par, compared with 44% of par for 2003 defaults and 22% for 2002 defaults. Not surprisingly, recovery values, as measured by bond prices one month after default, have appreciated in lock-step with tighter spreads and a booming equity market, all responding to stronger credit and economic conditions. Fitch used the trading price of defaulted bonds one month after default as a measure of recovery value.

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.