Fitch: Energy, Metals/Mining Drive U.S. HY Defaults & Lower Market Recovery Prices
Significant commodity price erosion and weak cash flow prospects have
hurt the average trading prices on defaulted bond issues, according to
Fitch Ratings. By proxy, this has impaired the market implied recovery
rates for defaulted energy and metals/mining debt.
The trailing 12-month (TTM) average price of defaulted bonds 30-days
post-default dropped to $0.38 versus $0.63 six months prior to default.
For 2014, without the full impact of the late year plunge in commodity
prices, average prices six months before default were the same as those
30 days afterward. The 2015 TTM energy and metals/mining defaulters felt
the pain of low commodity prices more acutely, averaging just $0.33 and
Fitch believes more defaults in both sectors are likely given the amount
of debt trading at distressed levels and their low ratings. 90% of
third-quarter default volume is in the energy and metals/mining sectors.
"High yield defaults are still mostly isolated to the energy and
metals/mining sectors," said Eric Rosenthal, Senior Director of
Leveraged Finance. "While their second-quarter financial metrics have
dragged down the market average, the rest of the universe continues to
Among the 359 U.S. high yield companies in Fitch's sample, with public
financials dating back to 2011, average total leverage ratios rose to
5.4x during 2Q15 from 5.1x in 1Q15. Leverage remained essentially flat
by excluding the sample's 87 energy and metals/mining companies.
For the energy and metals/mining companies alone, 2Q15 TTM EBITDA
declined 63% year-over-year while total debt increased 19% from the year
prior. The percentage of these companies reporting revenue increases
during 2Q15 tallied only 14% compared with 77% one year earlier.
Companies outside of these two sectors saw, on average, 11% gains in
year-over-year TTM EBITDA and an 8% increase in total debt. Only 5% of
these companies had negative 2Q15 EBITDA versus nearly 35% for energy
The TTM U.S high yield default rate climbed to 2.8% in August, from 2.5%
in July propelled by bankruptcies in the energy and metals/mining
sectors. The TTM metals/ mining default rate rose to 10.4% while the
rates for energy and exploration and production (E&P) closed August at
3.3% and 5.5%, respectively. The TTM energy rate is now at its highest
level since 1999.
Fitch expects the default rates for energy and E&P to approach 5% and
8.5%, respectively, in September based on this month's filings from
Halcon Resources and Samson Resources.
The full report, "U.S. High Yield Default Insight: Energy TTM Default
Rate Approaches 5%; Highest Level Since 1999," is available at www.fitchratings.com
Additional information is available at 'www.fitchratings.com'.
Fitch U.S. High Yield Default Insight (Energy TTM Default Rate
Approaches 5%; Highest Level Since 1999)
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