While some firms are still teetering on the edge of default, the first half of 2003’s 57 is a much more encouraging sign than 108 for the comparable period in 2002. The decline was even more pronounced for the volume tally, which fell 69% to $17.9 billion from $57.3 billion, according to Fitch’s US High Yield Default Index.
Through June, only three companies have defaulted on obligations in excess of $1 billion. By comparison, in 2002, 12 companies had produced billion dollar defaults at the same point. Yet, June was far from all sunshine and roses, with $2.3 billion in defaults overall. Topping the month’s rolls was textile manufacturer WestPoint Stevens, the newest member of the billion-dollar default fraternity.
Moreover, the average size of bond defaults per issuer fell to $314 million in the first half of this year, from $674 million in 2002 and $452 million in 2001. Fitch attributes this to the conspicuous absence of large telecommunication and fallen angel defaults.
Year-To-Date Default Rate
The promising start of 2003, placed Fitch’s year-to-date default rate figures for the first half of 2003 of 2.8%, a dramatic reduction from the 9.5% rate recorded in the first half of 2002. Additionally, the trailing-twelve-month default rate dropped to 10.3% in June, from the December 2002 peak of 16.4%.
Fitch attributes the decline in the default rate figures to a trio of factors:
- the market’s stronger credit mix
- a more receptive funding environment
- improvements in the rating activity for the US high yield market.
Despite the overwhelming positive picture painted by bond defaults were still active in the first half of 2003. Leading the charge in terms of the dollar amounts was the $4 billion generated in the telecommunications sector. This was followed by:
- Health care and pharmaceutical – $3.8 billion
- Transportation – $2 billion
- Metals and mining – $1.2 billion
- Food, beverage and tobacco – $1.2 billion
- Textiles – $1.1 billion.
Not surprisingly, many of the same players were also found in the top five industry default rates, a group that was headed up by health care and pharmaceuticals and textiles and furniture’s 12.6%-bond default rate. This duo was followed by:
- Transportation – 8.8%
- Metals and mining – 8.4%
- Food, beverage and tobacco – 7.1%.
Overall, eight sectors out of 25 experienced default rates above the market average of 2.8%.
The first half’s numbers were influenced by the five largest defaults in the period ending in June, which was overwhelmingly topped by HealthSouth’s $2.8-billion default: After this, the first half also saw:
- Fleming – $1.2 billion
- WestPoint Stevens – $1.0 billion
- Leap Wireless – $0.9 billion
- Magellan Health Services – $0.9 billion.
This data all culminated in the weighted average recovery rate moving up to 33% of par for defaulted issues through June compared with 22% of par for full year 2002, an improvement being attributed in large part to fewer low value telecommunication defaults. Nonetheless, even excluding the telecom factor, recovery rates were still up in the first half of 2003, reaching a weighted average of 38% of par for non-telecom defaults compared with 34% of par for non-telecom defaults in 2002.
Fitch’s high yield default studies are available on the Fitch Ratings Web site at www.fitchratings.com .