Dec 20 - Fitch Ratings is projecting a U.S. high yield par
default rate of 2% in 2013, in line with 2012 activity. However, a bankruptcy
filing by Energy Future Holdings, given its large size ($16 billion), has the
potential to drive up the rate an additional 1.5%.
The leading support for another below-average default year is Fitch's
expectation of modestly higher U.S. GDP growth of 2.3% in 2013 combined with
relatively good corporate fundamentals and the Federal Reserve's commitment to
loose monetary policy. The U.S. macro backdrop - a mild recovery - is expected
to remain steady.
While the default rate is projected to remain low in 2013, it is important to
note that the positive high yield rating drift of 2010 and 2011 reversed
direction over the course of 2012 and the 'CCC' or lower pool expanded for the
first time since 2009 - now $228 billion in size versus $197 billion at the
beginning of the year.
In addition, demand for yield product has begun to have a more meaningful impact
on transaction risk with paid-in-kind bonds, covenant-lite loans, and surging
'CCC' issuance - all examples of more aggressive issuance activity going into
2013. In this context, the low default rate needs to be viewed with caution as
more of a lagging rather than leading indicator of credit conditions.
Through mid-December, this year's default tally stood at $20.5 billion compared
with $15.9 billion for all of 2011. Defaults in November affected $1.5 billion
in bonds, but December will add another $5.6 billion, including Edison Mission's
recent bankruptcy filing.
The default rate is expected to end the year close to 2%. The weighted average
recovery rate on defaults through November was 48.3% of par.
For additional details please see the full report, 'Fitch U.S. High Yield
Default Insight - 2013 Outlook', available at 'www.fitchratings.com' or by
clicking on the link below.