October 23, 2008 / 2:16 PM / 11 years ago

US high yield debt may face record defaults-Fitch

NEW YORK, Oct 23 (Reuters) - The coming wave of U.S. high-yield corporate bond defaults may be the worst ever and impact more industry sectors than the downturn of 2001-2002, Fitch Ratings said Thursday.

A record 24 percent of the U.S. high-yield market is currently rated “CCC”, or eight grades into speculative, or ‘junk’, status, placing a full $188 billion of debt at risk of default, the agency said in a report.

“Economic weakness will continue to add to the pool of high risk borrowers,” said Mariarosa Verde, managing director of Fitch Credit Market Research.

“Add tight credit to the mix and the result will either be a concentrated surge in defaults over the next two years or a protracted period of above-average annual default rates.”

Low corporate default rates that acted as a support for the high-yield sector have fallen apart at an alarming rate in 2008, and the recent turmoil in financial markets has added to the gloom, said the report.

Default rates typically surge a year after meaningful contraction in corporate profit growth. That trend emerged in 2007 and has accelerated into 2008.

High-yield defaults have already started to rise but the worst impact will be felt in 2009 and 2010. The trend will be exacerbated by tight borrowing conditions, said Fitch.

It added that the leveraged loan issuance boom seen in 2004 through 2007 could also have unintended negative consequences for credit availability.

Lower recovery rates on loans and bonds, resulting from the preference in recent years for loan-heavy capital structures, may reduce refinancing opportunities for high yield issuers, as new lenders or investors will be scared away by this additional risk factor, said the report.

The combination of these factors will likely create a scenario that will more closely resemble the recession of the early 1990s than that of 2001 to 2002. Weak consumer spending will be compounded by the high leverage levels across many firms, which previously were better capitalized to withstand a downturn, said Fitch.

The U.S. high yield default rate has posted its biggest increase in several years, climbing to 3.2 percent through September from 0.5 percent at end-2007.

The par value of U.S. high yield bond defaults totaled $25 billion in the first nine months of 2008, up from $3.5 billion for all of 2007.

“The number of issuers defaulting on their bond obligations more than doubled over the first nine months of 2008 relative to all of 2007, with 35 issuers defaulting through September compared with 15 in 2007,” said Eric Rosenthal, director of Fitch Credit Market Research.

By comparison, in 2001, 173 issuers defaulted on $78.2 billion in bonds, yielding a default rate of 12.9 percent. In 2002, 165 issuers defaulted on $109.8 billion in bonds, generating a default rate of 16.4 percent.

Reporting by Ciara Linnane; Editing by Walker Simon

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