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By Matthew Quinn
The high-yield default rate soared in 2009 and recovery rates for secured loans and bonds were particularly poor, highlighting the consequences of weakened underwriting standards and changing capital structures on credit risk.
The U.S. high-yield default rate finished 2009 at 13.7 percent, with companies defaulting on $119 billion in debt, according to a report released Friday by Fitch Ratings.
In 2009, a total of 151 issuers defaulted on their high-yield bond obligations, up from 63 in 2008 and just 15 in 2007. The default rate swung from an all time low of 0.5 percent in 2007, to 6.8 percent in 2008, to 13.7 percent in 2009.
The automotive sector experienced the year's highest industry specific default rate of 44.2 percent, and a total of ten sectors posted default rates above the full market default rate, Fitch found.
The average recovery rate, which fluctuated dramatically over the course of the year and varied widely by credit rating and sector, finished at 34.1 percent of par, meaning investors lost $78 billion.
In the first half of 2009, the average recovery rate was just 21.8 percent with a median of 17.4 percent. In the second half, the recovery rate nearly tripled to 59 percent and the median rose to 42 percent.
The distribution of recoveries was widespread with 29 percent of the year's defaulted bonds experiencing recovery rates of 0 percent to 10 percent of par and another 28 percent experiencing recoveries of 11 percent to 30 percent.
Sectors facing systemic industry problems experienced grim recoveries. The average recovery rate on broadcasting and media defaults was a measly 11.8 percent and automotive defaults registered a similarly bleak recovery rate of 15.3 percent.
Issuers in Fitch's U.S. High Yield Default Index with outstanding loans at the time of default recorded an average loan recovery rate of 59.6 percent in 2009 with a median of 65.5 percent.
The distribution of loan recovery rates in 2009 was worse than any other period since at least 2000 with just 43 percent of loans in Fitch's sample experiencing recoveries of 70 percent of par or higher.
The average recovery rate on secured bonds was also low at just 36.8 percent of par, with a median of 25.4 percent. This is noteworthy given that a record 42 percent ($65 billion) of high yield bonds sold in 2009 consisted of secured bonds.
And while Fitch forecasts a high-yield default rate of between 6 percent and 7 percent in 2010, the powerful high yield rally of 2009 may bring its own challenges as future defaults will occur from higher price points.
Additionally, Fitch believes significant risks linger for the high-yield market, including persistently high system-wide leverage; the potential for numerous economic pitfalls including weak consumer spending and high energy costs; record volumes of leveraged loans and bonds coming due over the next few years; and the seasoning of weaker deals brought to market from 2005 through 2007.
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