Fitch Ratings forecasts the 2016 US high yield bond default rate at 4.5%
as weak prices will continue to challenge energy and metals/mining
issuers. The energy sector default rate is projected to hit 11% in 2016,
eclipsing the 9.7% rate seen in 1999.
Excluding these two troubled sectors, defaults are expected to remain
below average. Removing energy and metals/mining from the index, the
remainder of the high yield universe is expected to finish 2016 with a
1.5% default rate, which is below Fitch's non-recessionary average of
2.1%. Barring high-yield energy companies, market access continues to be
favorable and earnings (again, outside of energy and metals/mining),
were generally good.
The current trailing 12-month (TTM) default rate is 3.3%, climbing from
3% at the end of November. In December, more than $5 billion of defaults
were recorded, the most tallied in a single month since January.
Fitch upped its year-end projection in early October to 3.5%. It would
take roughly $2.5 billion of defaults over the remainder of the year
($50 billion in total defaults) to reach our expected 3.5% mark for 2015.
A 4.5% 2016 high yield default rate equates to $66 billion of defaults
and would be the fourth highest default total since 2000. This would be
close to the $78 billion amassed in 2001 but well below the record $119
billion posted in 2009.
At the beginning of December, $98 billion of the high yield universe was
bid below 50 cents, while $257 billion was bid below 80 cents. The
battered energy and metals/mining sectors comprise 78% of the total bid
below 50 cents. In addition, 53% percent of energy, metals/mining
companies rated 'B-' or lower were bid below 50 at the start of
December, compared to 16% at the end of 2014, reflecting the decline in
crude oil prices.
The December energy TTM rate is expected at nearly 7% while the
exploration & production rate is closing in on 12% following a chapter
11 filing for Vantage Drilling and missed payments for Magnum Hunter
Resources and Swift Energy. Energy outstandings are at $259 billion,
making up 18% of the market, with $68 billion in the 'CCC' rated
We recently revised our oil price assumption down to reflect the risks
of a lower-for-longer scenario, lowering our 2016 oil price (West Texas
Intermediate) to $50/bbl, 2017 to $60/bbl, and 2018 to $65/bbl prior to
an expected recovery to $70/bbl in 2019. After some delay, the heavy
capex cuts seen across the industry have begun to pull back supply,
particularly from US shale, with US oil production declining 400,000
barrels per day (bpd) to 9.2 mmbpd from peak levels that were around 9.6
mmbpd. However, the US supply response to lower prices has been muted to
date, and it appears a second round of capex cuts will be required to
bring down bloated global oil inventories and help restore the markets
Energy and metals/mining comprise 79% of the defaulted volume since the
start of the third quarter and account for 70% of the 2015 defaults,
after removing Caesars Entertainment Operating Co.
Caesars served as the lone bond default with outstandings exceeding $2.3
billion in 2015 and the overall TTM rate will fall by 1% when it leaves
the default universe in January. Nevertheless, Fitch believes there are
some large candidates at risk for default in 2016, including Yankee
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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