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.