Fitch: 12 Mo. Default Rate 10% In June, Telco Losses Rise To 95%
13 Jul 2001 9:45 AM
Fitch-NY-July 13, 2001: Capping a six month string of record defaults, June added $5.8 billion to the year's default count and pushed year-to-date default volume to an astonishing $45.5 billion, more than triple the $14.2 billion reached in the first half of 2000. Fitch calculated a trailing twelve month default rate through June of 10% and a year-to-date default rate of 7.8%.
In June twelve issuers defaulted on their bond obligations including the biggest telecom default on record, the bankruptcy filing by PSINet. Other prominent defaults for the month included fellow telecom company, 360Networks, manufacturer of cutting and welding products, Thermadyne, supplier of in vitro laboratory products, Dade International, and USG, another building & materials company forced into bankruptcy due to asbestos litigation. Of note, including USG, the year-to-date volume of fallen angel defaults hit $17 billion in June. Excluding fallen angel defaults, Fitch calculated a trailing twelve month default rate of 7.3% through June and a year-to-date default rate of 5.2%.
Overall, second quarter default activity nearly matched the first quarter. The second quarter produced $23.3 billion in defaults and a three month default rate of 4.1% compared to $22.2 billion for the first quarter and a 4% default rate. Oddly enough, the impact of fallen angels and telecom defaults, the primary drivers of rising default rates this year, also moved in parallel fashion in the two quarters. In the first quarter, $15.9 billion, or 72% of the quarter's volume resulted from a combination of telecom and fallen angel defaults. In the second quarter, this trend held firm, with $16.7 billion, again 72% of the quarter's volume, resulting from the two.
For the first half of the year, telecom defaults reached $15.5 billion, resulting in a year-to-date default rate for the sector of 13.4%. Fitch had estimated that up to $20 billion of high yield telecom issues were at high risk of default by year end. As evidenced by the $15.5 billion, many of these have in fact already defaulted. At $20 billion, the default rate for the sector would approach 20% with a likely comparable loss rate since recovery values on these defaulted issues have to date been severely depressed as described below.
Excluding telecom and fallen angels, the remainder of defaults for the six month period, totaling $13 billion, were scattered among sixteen industry sectors, with the biggest concentrations in leisure and entertainment ($1.3 billion default volume, sector default rate 15.5%), food, beverage & tobacco ($1.4 billion volume, default rate 13.1%), paper and forest products ($1.8 billion volume, default rate 11%), and metals and mining ($1.5 billion volume, default rate 9.9%). Nearly half of Fitch's industry groups experienced default rates below 3% and six sectors had zero defaults.
Fitch's preliminary analysis of recovery rates for the second quarter suggests that there was little relief for investors with regard to losses on defaulted bonds. While the weighted average recovery rate (weighted by principal amount) on fallen angel defaults remained fairly steady, averaging 78 cents on the dollar in the second quarter compared to 80 cents in the first quarter, the weighted average recovery rate on defaulted telecom bonds actually fell from 11 cents in the first quarter to 5 cents in the second quarter (or from a principal loss of 89% in the first quarter to 95% in the second quarter) and also fell for the remainder of defaulted issues, from 19 cents in the first quarter to 15 cents in the second quarter. Overall, the recovery rate for all defaulted bonds in the second quarter was 25 cents on the dollar compared to 46 cents in the first quarter. Fitch uses the price of defaulted bonds one month after default as a measure of recovery value. For June defaults recovery rates were estimated using bond prices as of the date of this press release.
Overview of the Fitch High Yield Default Index
Fitch's default index is based on the U.S. dollar denominated, non-convertible, speculative grade bond market (the rating equivalent of `BB+' and below). Fitch includes rated and non-rated, public bonds and private placements with 144A registration rights. Defaults include missed coupon or principal payments, bankruptcy, or distressed exchanges. Default rates are calculated by dividing the volume of defaulted debt by the average principal volume outstanding for the period.
Fitch's high yield default studies are available on Fitch's web site at `www.fitchratings.com'.
Contact: Mariarosa Verde 1-212-908-0791, Paul Mancuso 1- 212-908-0225, Robert Grossman 1-212-908-0535, New York.
Media Relations: James Jockle 1-212-908-0547, New York. |
