Jan 28 - For the third consecutive year, the U.S. high yield par default rate remained well below average, ending 2012 at 1.9% and up just modestly from 1.5% in 2011, according to Fitch Ratings.
Thirty-two issuers defaulted on $20.5 billion in bonds compared with 29 issuers and $15.9 billion in 2011. The year produced a considerable number of large defaults, including Edison Mission ($3.7 billion), Residential Capital ($2.8 billion), Energy Future Holdings ($1.8 billion), and ATP Oil & Gas ($1.5 billion). An additional four came close to or topped a billion.
The weighted average recovery rate on the year’s defaults was 50.2% of par and the median rate was 38.9%. Both measures, while still good, slipped from 2011’s more robust 59.4% average and 47.9% median.
Still, with a par weighted average recovery rate of 50.2% and a default rate of 1.9%, the market’s loss rate was 0.9% in 2012 -- by all accounts a benign figure. The loss rate was 0.6% in 2011 and in 2009 hit 9.1%.
The mix of issuer defaults originating from a bankruptcy filing, missed payment, or distressed debt exchange (DDE) was unremarkable in 2012 versus historical patterns. Bankruptcy was the leading cause of default (16 of the 32 issuers), followed by missed payment (11 issuers), and lastly by DDEs (five). The weighted average recovery rate on the DDEs of 69.1% was higher than the non-DDE average recovery rate of 46.5%.
Defaults in 2012 continued to come from the very bottom of the rating scale ? 90% of defaulted issues were rated ‘CCC’ or lower at the beginning of the year.
Fourteen industries experienced some default activity in 2012; this was up from 12 in 2011. The utility sector produced the year’s top default rate of 10.5%. This was due to Edison Mission’s bankruptcy filing and Energy Future Holdings’ distressed debt exchanges, both of which occurred in December. Paper and containers followed with a 7.7% default rate.
Examining recovery rates by seniority, 2012 produced average and median recovery rates of 64.7% and 62.0%, respectively, for senior secured bonds; 42.8% and 36.2% for senior unsecured bonds; and 38.3% and 26.6% for subordinated issues.
Fitch is projecting that default activity in 2013 will remain in line with 2012. The default rate is expected to end the year at 2%, barring a bankruptcy filing from Energy Future Holdings, which due to its large size has the potential to push the rate above 3%. Fitch’s U.S. GDP growth target for 2013 is 2.3%.
For full details on the year’s default and recovery trends please see ‘Fitch U.S. High Yield Default Insight - 2012 Review’, available at ‘www.fitchratings.com’ or by clicking on the link below. Fitch’s 2013 outlook is also available via the link below.