High Yld Issuance Turns Aggressive, Fuel for New Defaults?

[HenryTo]

February 23:Credit Risk - US High Yield Issuance Turns More Aggressive in '04, Fuel for New Defaults?

Author: RiskCenter Staff
Date: 2005-02-23


Fitch Ratings has released its year-end review of default trends for the US high yield bond market.

Fitch Ratings has released its year-end review of default trends for the U.S. high yield bond market. The new study includes a survey of credit measures for speculative grade companies, an update of recovery rate trends for loans and bonds in the improved credit climate of 2003 - 2004, and, in light of the heavy issuance volumes of 2002 - 2004, an analysis of the common belief that such issuance booms typically result in heightened default risk three years post issuance.

History certainly suggests that high yield issuance rallies often pack substantial risk. For example, Fitch has been tracking the cumulative default rates of the pool of bonds sold from 1997 - 1999 and has found that at the extreme, 48% and 47% of high yield bonds sold in 1999 and 1998, respectively, had defaulted by 2004 with the bulk of the defaults (nearly 90%) occurring by 2002.

Over the past several years, the market has once again seen strong issuance volumes and renewed anxiety over the outcome of the bond sales three years out. However, Fitch research suggests that use of proceeds and timing vis-a-vis economic conditions are the factors more closely aligned with higher defaults three to four years after issuance.

The issuance boom of 2002 - 2004, much of it dedicated to refinancing activity, has in reality helped companies avoid default in the near to medium term by significantly lowering their cost of debt, happily at the same time that the improving economy has boosted credit fundamentals.

'What is noteworthy, however, is that while refinancing dominated issuance over the past several years, in 2004 new issuance began to take on more aggressive characteristics as corporate conservatism began to give way to growth oriented but higher risk activities such as acquisitions and leveraged buyouts,' said Mariarosa Verde, Managing Director, Credit Market Research, Fitch Ratings. 'This trend is more than likely to accelerate in 2005.'

The par value of U.S. high yield bond defaults totaled just $10 billion in 2004, less than a third of 2003's $33.8 billion and far less than 2002's record $109.8 billion which produced an unprecedented default rate of 16.4%. The default rate in 2004 contracted to 1.5%, the lowest annual level since 1997.

'Year over year, the number of issuers defaulting on their bond obligations fell 63% in 2004 and the par value of bonds affected by defaults fell 70%,' said Paul Mancuso, Senior Director of Credit Market Research, Fitch Ratings.

Many factors contributed to 2004's dwindling defaults, chief among them, a robust domestic economy, improving corporate fundamentals and a market eager to extend credit, even to companies on the lowest rung of the rating ladder. Fitch believes macro economic and credit conditions will continue to support below average default rates in 2005.

Source: RiskCenter.com

[rffrydr]

Always fighting the last war. So much for Altman's "Z"-score. Behind every quantity there is a quality. Clearly vaporware lending was unrivaled even by sub-prime.


p.s. The timing adage however was right on: 3yrs hence.
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Today is the Tomorrow you worried about Yesterday!