TEXT-Fitch:Lull in high yield defaults temporary, secured bonds warrant caution
Nov 29 - Given the lack of defaults in October, the trailing 12-month U.S. high yield default rate fell to 1.9%, according to Fitch Ratings. However, as with 2010 and 2011, the last two months of the year will see more than their fair share.
There are already five issuer defaults on $5.5 billion in bonds in the pipeline for November and December, including Edison Mission Energy, which missed a Nov. 15 interest payment and is teetering on bankruptcy. The year-to-date default tally of $13.4 billion and 25 issuers through October will move up to $18.9 billion and the issuer count to 30 with this recent batch of defaults. The default rate is expected to end the year close to 2%.
Nine of the 25 issuer defaults through October involved companies that sold secured bonds since 2009. Secured bonds now total $250.3 billion, or 22.4% of high yield market volume. The vast majority of this volume consists of bonds sold over the past several years. Fitch notes that this group's rating mix is surprisingly worse than the rating distribution of unsecured issues (24.6% of secured issues are rated 'CCC' or lower versus 19.5% for the rest of the market). In addition, Fitch's data on secured bond defaults shows that recovery outcomes have a fairly flat distribution, meaning that low and high recoveries appear just as likely and are dependent on the specific circumstances of the affected issuers. The secured designation should be viewed with caution both from a default and recovery perspective.
Fitch notes that a key factor shaping the default environment this year has been the extraordinary funding environment. In October, 28% of new issuance was rated 'CCC' or lower - a high for the year. This activity has put near term downward pressure on the default rate. However, a survey of the 31 companies that sold bonds since 2009 and subsequently defaulted finds that the majority used the proceeds to refinance existing debt. For this group whose fundamentals did not improve, refinancing provided only short term relief. The average time from the last bond sale to default for these issuers was 1.5 years.