Fitch: U.S. high-yield default rate heads below 2.5%; ‘temporary dip’

By Caroline Salls

Pittsburgh, May 17 – Fitch Ratings’ May trailing-12-month U.S. high-yield default rate is heading below 2.5%, the lowest level in nearly two years, according to a report released Wednesday.

Fitch said the default rate tallied 3.2% at end-April.

Despite the temporary dip, the ratings agency said it maintains its default forecast at 3% for year-end 2017.

“The high-yield default universe is seeing a shift in sectors represented as commodity price-related defaults slow and energy companies reorganize with less leveraged balance sheets,” Fitch’s Eric Rosenthal said in the release.

“The rate will increasingly be determined by companies with idiosyncratic issues, though the retail sector remains firmly on the radar, with a 9% year-end default forecast.”

Fitch said rue21, Inc.’s Monday Chapter 11 filing represents the first retail bankruptcy in 2017 with high yield in the capital structure. Fitch expects the sector to generate more than $4 billion in defaults, led by Claire’s Stores, Inc.

In addition, Fitch said it believes a bankruptcy from iHeartCommunications Inc. is likely, an event that would add 0.8% to the default rate. When that occurs, iHeart would join Spanish Broadcasting System, Inc. and Affinion Group Holdings, Inc. in the broadcasting/media sector default tally.

Utilities, power and gas is another sector to watch, according to the release, as Genon Energy Inc. and FirstEnergy Solutions Corp. are on Fitch’s bonds-of-concern list, and defaults from both would push the sector default rate above 6%.

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