After five issuer defaults already this month accounting for nearly $2
billion in new volume, Fitch Ratings now expects the US high-yield
default rate to end 2015 at around 3.5% - above the 2.9% trailing 12-
month (TTM) rate through September. This higher expectation - from the
previous range of 2.5% to 3% - reflects ongoing strife in the energy and
Our expectation of a mid-three percent default rate is materially above
the average during non-recessionary periods of 2%. (The average rate
during recessionary periods is 11%.)
Risks to our default rate expectation are to the downside, with a 4%
rate more likely than a 3% rate for year-end 2015. The overall default
rate is set to rise further in 2016.
The market is clearly bifurcated - the commodity complex is in a down
cycle while the rest of the market is exhibiting relative benign default
For example, September energy and metals/mining trailing TTM default
rates stood at 5% and 10%, respectively. The energy default rate is at
its highest level since 1999, when it registered 10%. Energy and
metals/mining entities accounted for 90% of third quarter defaults.
These sectors experienced three consecutive months with over $4 billion
in defaults, a level not seen since 2009 when monthly volume in the
entire market exceeded $4 billion for seven straight months.
By contrast, the default rate is below 1% after removing energy and
metals/mining defaults as well as Caesars Entertainment Operating Co.
(which defaulted in January) from the September TTM figure.
It would take approximately $19 billion of additional default volume in
the final three months to reach a 4% default rate for 2015. This value
of defaults would be more than the average fourth quarter defaults of $6
billion during the non-recession years since 2010 but well below the
recessionary peak of $33 billion experienced in the final quarter of
Price collapses and oversupply continue to afflict the energy and
metals/mining sectors and are reflected in their bond prices. Roughly
$82 billion of outstanding energy and metals/mining bonds are rated
'CCC' or lower. About half of energy and metals/mining bond issues
(which comprise 22% of the overall high yield market) are bid below 80
cents, compared to 10% for the rest of the universe. Just 7% of energy
and metals/mining was bid below 80 one year ago.
Further, a material number of bonds in the space are bid below 40 cents,
including Arch Coal Inc. and Peabody Energy Inc., with a combined $8
billion of bond debt. Chapter 11 filings by both companies would add
0.5% to the default rate.
Asset-based revolver borrowing base resets for several troubled energy
companies are slated for later this month, placing further pressure on
liquidity as oil prices as of yesterday are near $50 a barrel.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
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