Fitch: High-yield European default rates still low in third quarter at 0.2%

By Caroline Salls

Pittsburgh, Oct. 19 - Default rates in the European high-yield market continued at the low level of 0.2% for the third quarter, against 0.5% for the same period in 2004 and 6.3% in 2003, according to a Fitch Ratings report.

No issuer defaulted in the third quarter, while the total market volume for sub-investment grade bonds increased by 16% to €145.5 billion from €125.7 billion in the second half of 2005, versus €98 billion in 2004.

Fitch said the year-to-date September average recovery rate was 55% based on two defaults. This is well below the unusually high 95.8% in 2004, which reflected the technical, rather than financial, nature of the sole default in that year.

However, according to Fitch, the average recovery rate remains extremely high compared to historical averages of 15% in 2002 and 24% in 2003.

Despite this continued low default rate, the agency said it expects a significant increase in defaults in 2006 and 2007, given the very high levels of financial leverage observed in transactions throughout 2004 and 2005 and the amount of CCC rated bonds that accounted for 20% of year-to-date issuance.

The concentration of CCC to C rated bonds within the existing high-yield market decreased to 9.5% in the third quarter from 11.2% in the first half of 2005, while the concentration of BB rated bonds increased to 61.6% from 54.8% in first half of the year.

However, Fitch reported that this is largely attributable to the downgrades of GMAC and Ford bonds, which together account for 47% of BB rated bonds in the European high-yield market.

New issues in the third quarter increased to €7.2 billion, compared to the €4.7 billion in the third quarter of 2004 and accounted for 36% of increase in total market volume with most of the remainder attributed to the downgrade of Ford.

Therefore, Fitch said the €20 billion total issuance year to date in September was only 6% behind the €21.3 billion recorded for the same period in 2004.

Bonds rated BB increased to 37% of new issues in the September year to date, compared to the 32% in the first half of 2005.

Issues rated CCC over the same period made up 20% as compared to the 26% in the first half of the year, which is a result of the strong issuance of HoldCo pay-in-kind instruments and issuance from the cable sector earlier this year, according to Fitch.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.