Fitch Ratings is reducing its 2016 US high yield bond default rate
forecast to 5% from 6% and expects the overall 2017 rate to finish at
3%, below the 4.1% historical average. Crude oil prices stabilizing in
the mid-$40s that aided the challenged energy sector, coupled with
improving conditions in the high yield market, contributed to Fitch
lowering this year's expected rate.
The YTD default total stands at $63.5 billion, and Fitch expects the
figure to end 2016 at roughly $75 billion, down from the previously
anticipated $90 billion. Default volume has dropped noticeably in the
third quarter, with just $10.1 billion thus far, compared with $34.7
billion in the prior quarter. The August TTM default rate is at 4.9%,
while the energy rate is at 15.8%.
YTD energy defaults total $37.5 billion, with $32.9 billion pertaining
to E&P companies. Fitch's year-end 16%-18% energy forecast equates to
roughly $42 billion-$50 billion of volume. If crude oil prices stay in
the mid-$40/barrel range, the lower end of the range appears more likely.
In addition, Petroleos de Venezuela SA (PDVSA), the largest name on
Fitch's Bonds of Concern list, is attempting to address its upcoming
bond maturities through a voluntary exchange slated for completion on
Oct. 14.
Secondary bid levels strengthened significantly from earlier in the
year. Currently, $75 billion of issues are bid below 70, a striking
difference from the $280 billion seen in mid-February. In addition, the
high-yield distress ratio has declined for six straight months and is at
its lowest level since last June, while 'CCC' rated corporate spreads
have tightened more than 800 basis points since mid-February.
The 2017 3% forecast is slightly above the nonrecessionary 2.2% average
and translates to roughly $45 billion of defaults. This rate would be
comparable to the volume posted in 2015.
The 2017 high-yield maturity wall is relatively low, with $64 billion
coming due. Furthermore, just $17 billion is rated 'CCC' or lower, which
is the rating category that accounts for the vast majority of near-term
defaults.
The amount of energy defaults, coupled with a lack of new issuance,
caused the 'CCC' outstanding universe to fall to $242 billion (16% total
market) at the end of August from $288 billion in February.
On the institutional leveraged loan front, Fitch believes the 2016
default rate will finish modestly below our 2.5% forecast and that the
2017 rate will end at 2%. The August TTM rate is at 2.2%, but September
is poised to break a string of 22 months with at least one default. The
2017 projection is below the 2.8% historical average but slightly above
the 2015 rate.
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 can be accessed at www.fitchratings.com.
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