More Junk Bonds, More Defaults — Fitch Ratings

Even though the trailing 12-month default rate on high-yield bonds in July was a little better than the June rate, Fitch Ratings expects the default rate to end the year with a 2.5%-3% rate. The agency noted that although only one bankruptcy was filed in July — Patriot Coal Corp. — so far this year the defaulter count is 20 and the value of defaulted bonds is $10.2 billion. At the same time last year there had been 10 defaults valued at $4.7 billion.

A high-risk pool of bonds rated ‘CCC’ or worse is larger than it was at the beginning of this year and now totals $55 billion. Fitch estimates a default rate of 15% for this group. More important perhaps, at the end of July this batch of bonds represented 21% of market volume, or $221.7 billion. At this time a year ago the high-yield junk represented 19% of market value, or $196.8 billion.

Here are a few highlights:

• Of 34 issues so far this year, the weighted average recovery rate on Senior Secured debt is 79.1%, while Senior Unsecured debt is recovered at a rate of 33.2% and Subordinated debt’s recovery rate is 58.3%.
• The industry with the highest weighted average recovery rate is telecom (78.1%) followed by energy (76.2%), transportation (66.6%), and utilities (64.9%.
• The industry with the lowest weighted average recovery rate is automotive (24.6%), followed by banking and finance (34.2%) at 32%.

The Fitch Ratings report is available here.

Paul Ausick