Energy and metals/mining defaults continued unabated midway through the
fourth quarter, placing continued pressure on the U.S. high yield
default rate, according to Fitch Ratings. Five energy companies either
completed distressed debt exchanges (DDEs) or missed a payment in
October while five defaults have been recorded so far this month.
The energy trailing 12-month (TTM) default rate finished October at
5.3%, the highest point since a 9.7% peak in 1999, while the exploration
and production subgroup TTM rate hit 9.0%.
The metals/mining sector TTM rate stands at 9.5% while the coal
subsector jumped to 27.0%. November defaults for coal producer Hidili
Industry International and Essar Steel Algoma Inc. along with a
potential filing for Arch Coal Inc. would propel the metals/mining TTM
rate above 14% and the coal subsector to 40%.
The overall TTM default rate remains subdued and ended October at 2.9%
with problems remaining largely contained to energy and metals/mining.
The rate not including energy, metals/mining, and Caesars Entertainment
Operating Co. is 0.7%.
A large majority of this year's metals/mining defaults have been
bankruptcies; however, a significant portion of the energy defaults have
involved DDEs. In total, 11 energy companies utilized DDEs since the
start of April to improve their capital structure and buy time as
liquidity and cash flows are pressured by oil prices languishing at
nearly $45 per barrel.
In addition, new issuance has averaged just $13 billion since June,
leading to a 13% decline in year-to-date volume to $214 billion versus
last year. Energy and metals/mining experienced no new high yield bond
issuance in October, the first time this happened since August 2011.
Volume in these two sectors is down 39% versus one year prior while the
rest of the market has fallen 5%. 'CCC' and non-rated activity has been
light all year, producing just 10% of issuance.
Tighter bank lending terms could trigger additional high yield defaults.
The October U.S. Federal Reserve Senior Loan Officer survey revealed
that bank lending standards have tightened for large and middle market
firms, reversing 14 quarters of easing. Additionally, the Shared
National Credit review released Nov. 5 noted that leveraged transactions
originated within the past year continued to exhibit weak structures,
especially related to oil and gas exploration, production, and energy
The full report, "Energy Default Rate Heads to 6%; Arch Filing Would
Push Metals/Mining Over 14%," is available at www.fitchratings.com.
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.
Fitch U.S. High Yield Default Insight (Energy Default Rate Heads to 6%;
Arch Filing Would Push Metals/Mining Over 14%)
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