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By Marine Cole
The pace of defaults by companies rated below investment grade slowed in the second half of 2009 and will continue to decline in 2010, but the default rate will continue to be above the long-term average, according to a report published this week.
Both the number of issuers defaulting on their debt during the most recent five months and the par value of bonds affected by the defaults are on pace to fall from the first half of last year, the report by Fitch Ratings said.
After soaring to 9.5 percent in June, with 103 issuers defaulting on a combined $79.7 billion, the number of defaults fell to 42 affecting $36.8 billion from July to November, resulting in a year-to-date default rate as of November of 13.6 percent. Fitch anticipates the rate will end 2009 just shy of the lower end of the agency's full year forecast of 15 to 18 percent.
The U.S. high-yield default rate will continue to decline in 2010 to 6 to 7 percent by year end, a marked improvement, but still above the long-term average annual rate of 4.7 percent, the credit rating agency noted.
“While upgrades are still limited, encouraging economic data and a return to more normal credit market activity have caused spreads to tighten to summer 2008 levels, a reflection of the market's improved risk appetite and confidence,” said Mariarosa Verde, managing director of Fitch Credit Market Research, in a press release.
Progress on the economic front and in funding conditions, including bank lending, have all helped companies avoid defaults. But leverage remains high, especially for companies that have defaulted due to out of court debt exchanges, which have offered some relief but haven't cut debt to the same extent as formal bankruptcy.
“A concern going into 2010 is not only the risk of new defaults but also a heightened risk of serial defaults,” noted Verde. “If growth proves weak, some of the debt restructuring measures adopted over the past year may have only been successful in helping companies defer rather than avoid bankruptcy.”
As of the end of November, companies rated CCC represented 30 percent of the high-yield market, another concern that recovery among high-yield companies isn't a given.
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