Fitch predicts increase in European high-yield default rates

By Angela McDaniels

Seattle, April 12 - Fitch Ratings said it expects European high-yield bond defaults to rise gradually over the next two to three years, despite the low volume of defaults in the first quarter of 2006.

This expectation is based on the large number of acquisition-related debt issues in 2004 and 2005, the increased share of CCC rated new issues in 2005 (17.7% compared with 11% in 2004) and potential rises in interest rates and the price of energy and raw materials, according to an agency release.

"We believe European high-yield bond defaults are at a turning point. The extraordinary low default levels experienced in the last two years will not be sustainable," Matthias Volkmer, an associate director of Fitch's leveraged finance team, said in the release.

The start of 2006 marks a third year of remarkably low default rates for the European high-yield market following the record lows of 0.5% in 2005 and 2004. The default rate was 6.4% (€5.7 billion par value) in 2003 and 25.1% (€ 19.4 billion par value) in 2002, the agency said.

The par value of European high-yield bond defaults totaled just €7.3 million in the first quarter of 2006, and the trailing 12-month default rate decreased to 0.3% in March from 0.5% at the end of 2005.

Dana Corp. was the only company to default during the quarter; it filed for Chapter 11 in March. The agency said that as most of Dana's initial €199.7 million bond issue in 2002 was repurchased at the end of 2004, the euro-denominated default volume is even smaller than in the comparable period of 2005, when RJ Tower Corp. and Concordia Bus defaulted on a total bond volume of €250 million.

Fitch said the total market volume for European speculative-grade bonds increased slightly to €144.8 billion in the first quarter from €143.3 billion at the end of 2005 as strong new issuance and additional fallen angel volumes were mostly offset by maturing bonds.

New issuance of €8.7 billion for the first quarter was slightly higher than the €8.5 billion issued in the first quarter of 2005 and well ahead of the €5.4 billion in the first quarters of 2004 and 2003. Fitch attributed the increase mostly to leveraged buyout-related jumbo issuance.

Emerging markets continued to feature strongly, with 14.5% of new issuers from those regions, including Kazakhstan, Russia, Ukraine, South Africa and Indonesia, while U.K. and German companies were the strongest overall contributors with over 54% of total issuance, the agency said.

Fallen angel volumes totaled €5.2 billion during the first quarter, including €1.9 billion for TDC AS, €1.2 billion for Ladbroke and €1 billion for VNU NV following downgrades due to the issuers' highly leveraged financial profiles.

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