Fitch: U.S. High Yield Default Losses 23 Bps Through 3Q; Par Default Rate 0.5%.
There have been both fewer and smaller defaults in 2010. The average size of bonds outstanding per defaulted issuer has fallen to $265 million this year versus $786 million per defaulted issuer in 2009. This explains why the par based default rate has contracted more than the issuer based default rate which stands at 1.6% year to date versus 0.5% for the par based rate. This pattern is not without precedent. Prior Fitch research has shown that large cap high yield companies (defined as companies with more than $500 million in bonds outstanding) show a higher propensity to default during stress periods than in benign default environments. Further, when examining the composition of the high yield market, Fitch finds that 71% of the market's par value is concentrated in just one quarter of the market's issuers. A lower rate of default among these larger borrowers puts downward pressure on the overall par based default rate. Fitch believes that the issuer based default rate will end the year in a range of 2% to 2.5% versus the 1% forecast for the par based rate.
The weighted average recovery rate on all defaults through September 2010 is 54% of par, above 2009's 34.1% of par. The loss rate associated with bond defaults this year has therefore plummeted to just 0.23% when combining the year to date default rate of 0.5% with a recovery rate of 54% of par on the defaulted issues.
Through September 2010, 19 issuers have defaulted on $5 billion in bonds versus 131 issuers and $90.3 billion in bond defaults in the first nine months of 2009. Three sectors have produced roughly half of this year's small batch of issuer defaults: broadcasting and media, banking and finance and building and materials - each with three defaults. However, the largest default thus far is retailer Blockbuster.
Five of the year's 19 issuer defaults have been in the form of debt exchanges. The exchanges have continued to produce substantially higher recovery rates than the more traditional defaults (through September 2010, 88.9% of par for the debt exchanges versus 35.2% for defaults associated with missed payments or bankruptcy filings).
The presence of debt exchanges combined with a relatively small pool of defaults has resulted in some anomalies in the data relating recovery outcomes to seniority. Through September 2010, the weighted average recovery rate on unsecured bonds is 80.4% of par, above the secured bond recovery rate of 51.3%, however, this unusual pattern is due to the high concentration of debt exchanges in the small pool of unsecured bond defaults.
The boom in high yield issuance continued unabated in the third quarter, pushing new bond sales to an astounding $200 billion in just the first nine months of 2010. Refinancing existing loans and bonds continued to dominate use of proceeds.
While the cost of high yield bonds issued in 2010 has fallen relative to 2009, the more important benefit from the surge in issuance has been the opportunity to push out debt maturities. Fitch's data shows that 87% of new bonds sold in 2010 mature in 2016 or later and 65% mature in 2018 or later.
Beyond refinancing, improving fundamentals have helped the survivors of the 2008-2009 economic and financial crisis avoid default in 2010. Fitch U.S. rating changes at the speculative grade level have been net positive in 2010 with upgrades topping downgrades by a margin of 1.9 to 1.
A combination of defaults booked in 2009 and upgrades in 2010 has had the most striking impact on the pool of CCC rated bonds which has contracted from a peak of $280 billion in early 2009 to $187 billion at the end of September 2010.
On a trailing 12-month basis, the U.S. high yield default rate fell to 3.5% at the end of September 2010, down from 4.5% at the end of June 2010 and 13.7% at the end of 2009. As Fitch discussed in a June 2010 report titled 'The Extreme Credit Cycle, Making Sense of a 1% U.S. High Yield Default Rate', the high yield default rate has posted its biggest post recession decline on record in 2010.
Additional information is available at 'www.fitchratings.com'.
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|Date:||Oct 20, 2010|
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