Fitch Ratings: Worldcom Bankruptcy Masks Lowest Default Month Since 2000.

Business Editors

NEW YORK--(BUSINESS WIRE)--Aug. 22, 2002

The largest bankruptcy in corporate history overshadowed a substantial slowdown in defaults in July, according to Fitch Ratings. The month produced default volume of $27.6 billion, a full $26.3 billion due to Worldcom's demise. Excluding Worldcom, default volume for the month totaled $1.3 billion, a monthly level not seen since the summer of 2000. Also excluding Worldcom, the number of defaulted issuers in the month, at 8, was also the lowest since mid year 2000. While the volume of 'CCC/C'-rated bonds, at $86.2 billion at the end of July, makes it unlikely that defaults will continue at this low level in the second half of the year, nonetheless, the month's tally marks the first truly meaningful slowdown in defaults in two years. To put the month's results in perspective, the number of defaulted issuers averaged 18 per month in the first half of 2002 while the volume of defaulted bonds averaged nearly $10 billion per month. In addition to this, average monthly post default recovery rates have consistently remained above the depressed levels seen in 2001, a positive trend this year despite continued high default rates. In fact, in a true reversal of fortune, the weighted average recovery rate for fallen angel Worldcom bonds, at just 13% of par, actually depressed overall recovery rates. The weighted average recovery rate for all other defaulted issues through July was 29% of par, a substantial improvement over the 15% of par recorded in 2001.

Through July, the volume of defaulted bonds totaled $84.9 billion. This translated into a year to date default rate of 13.5% (10% excluding fallen angels). The trailing twelve month default rate reached 16.8% in July, a peak unimaginable prior to the telecom crisis which has produced $61.9 billion in defaults in just the past twelve months, more than half of the twelve month total of $111.5 billion. In addition to telecom, the cable sector has added $16.9 billion to the twelve month default toll. The massive impact of the two industries on default statistics is evident when considering that excluding the two, the trailing twelve month default rate through July was a far more moderate 7.1% rather than 16.8%. The drop in the year to date default rate excluding the two sectors was even more dramatic, from the 13.5% noted above to just 4.2%. More than three quarters of this year's default volume has come from cable and telecom.

This year has produced three fallen angel defaults, Canadian telecommunications company Teleglobe, power generator Covanta Energy and Worldcom. Default volume for the first two totaled just over $1 billion. The trailing twelve month default rate excluding fallen angels reached 13.3% in July. Fitch expects this rate, which more closely reflects the state of the original issue high yield market, will remain at approximately this level for the remainder of the year.

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). 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.

Fitch's high yield default studies are available in the 'Credit Market Research' section on the Fitch Ratings web site at 'www.fitchratings.com'.