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.