In a news release, Fitch Ratings said it projects that the U.S. high-yield default rate will rise in 2012 to a range of 2.5%-3.0%, up from 2010’s 1.3% rate and this November’s 1.4% level. The long-term average annual default rate (1980-2010) is 5.1%.
Fitch said high-yield fundamentals remain solid, providing support for another below-average default year in 2012. However, a more cautious funding environment since the summer is having a greater effect on the most vulnerable companies in the high yield universe. This group remains at risk in the soft growth environment projected for 2012.
The seasoning of transactions brought to market from 2009 through 2011 will also contribute more significantly to defaults beginning in 2012 and continuing in 2013-2015. To date, default rates on the 2010 and 2011 issuance pools (totaling $500 billion) have been especially low at 0.3% and 0.5%, respectively. The operating success of companies that refinanced over this period will be tested over the next several years, especially in light of anticipated below-trend economic activity.
The bankruptcy filings of American Airlines and power generator Dynegy Inc., together with four smaller defaults, affected $6.4 billion in bonds in November. The year-to-date default rate rose to 1.4% from 0.8% in October.
The pace of defaults in 2011 has closely tracked Fitch’s expectations, including a clustering of defaults in the second half of the year. Recent activity, however, has moved beyond the year-end spike also seen in 2010. Market perception surrounding the viability of struggling companies has deteriorated as growth forecasts have been cut, pointing to a more challenging operating and funding environment for these issuers going forward.
Fitch finds that as of mid-December, approximately $60 billion in ‘CCC’ rated issues were trading at the distressed level of 80% of par or lower. This at-risk pool has doubled in size over the past year.