Below-Average High-Yield Default Rate to Persist Into 2013
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, Fitch said.
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, Fitch reported.
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, according to Fitch.
For the full Fitch U.S. High Yield Default Insight – 2013 Outlook click here.