October 12, 2017 / 12:54 PM / in 9 months

Fitch: Below-Average US HY, Loan Default Rates Forecast in 2018

(The following statement was released by the rating agency) NEW YORK, October 12 (Fitch) Fitch Ratings forecasts the U.S. high-yield default rate will finish 2018 at 2%, the lowest rate since 2013 and below the non-recessionary 2.3% average. The trailing 12-month (TTM) default rate stands at 1.6% and has declined for nine straight months. Should iHeartCommunications Inc. and a few other troubled retail and energy companies default before year-end 2017, the rate will inch up to nearly 2.5%. The 2018 high yield bond default rate forecast of 2% equates to $19 billion of volume. Just 17% of Fitch's high yield default universe comprises 'CCC' and lower-rated issues, well below the 36% peak registered in 2008. In addition, tighter corporate spreads, 75% of the secondary market bid above par and a minimal near-term maturity wall reflect the benign prospective default environment. Of the $101 billion in high yield due through 2019, just $26 billion comes from the lowest rated issues, $22 billion of which will be due in 2019. Fitch anticipates the U.S. institutional term loan default rate will end 2018 at 2.5%. The TTM rate currently sits at 1.8%, but additional default activity is expected from the broadcasting/media, retail and energy sectors prior to year-end. The 2018 loan default rate forecast equates to roughly $27 billion in volume. The institutional loan retail universe is nearly $20 billion larger in size than high yield and should produce twice the amount of default volume next year. Retail is expected to underperform versus all other corporate sectors and could account for $7 billion of loan default volume next year, leading to a sector default rate of 10%. The TTM retail rate hit 7.3% following Toys 'R' Us Inc.'s filing. There have been six issuer retail defaults over the past six months totaling $5 billion, or 30% of the default volume this year, versus $1.8 billion for high yield and a 3.8% default rate. The energy default cycle is in the recovery mode for bonds and loans. After peaking at 19.7% in January, the TTM high yield energy default has declined to 3.2% and is approaching our 2017 anticipated 2.5% rate. Fitch expects the energy rate to remain low at 2% in 2018, as crude oil prices have stabilized while the overwhelming majority of weaker energy issues have already defaulted. A couple of large energy loans, as highlighted in our Loans of Concern list, could keep the 2018 sector default rate in double digits, much as they did this year. The 13.4% TTM loan default rate resulted primarily due to bankruptcies from Ocean Rig UDW Inc. and Ascent Resources - Marcellus LLC. The energy loan universe is just one-fourth the high yield size and a large default would have a much more meaningful impact. When removing energy and retail anticipated loan defaults, Fitch's 2018 loan default rate falls to 1.5%, comparable to the non-recessionary 1.7% average. Contact: Eric Rosenthal Senior Director Leveraged Finance +1 212 908-0286 Fitch Ratings, Inc. 33 Whitehall St New York, NY 10004 Sharon Bonelli Senior Director Leveraged Finance +1 212 908-0581 John Kempf, CFA Senior Director Leveraged Finance +1 646 582-4710 Kellie Geressy-Nilsen Senior Analyst Fitch Wire +1 212 908-9123 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Related Research Fitch U.S. High Yield Default Insight (U.S. High Yield Default Rate Remains Below 2%; Seadrill Propels Yankee Rate) here Fitch U.S. Leveraged Loan Default Insight (Toys ‘R’ Us Filing Pushes Retail Loan Default Rate to New Highs) here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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