Defaults hold steady at 7.7% in August, recovery rate rises to 40% year to date, Fitch says

New York, Sept. 22 - The high yield default rate held steady for the 12 months ending in August, unchanged from July, according to Fitch Ratings.

Meanwhile the recovery rate on defaulted bonds rose to 40% of par for 2003 through the end of August, its highest level in more than two years and close to historical averages, Fitch said.

August saw $1.4 billion in defaults, Fitch said, with Aurora Foods and Horizon PCS being the two largest.

Fitch also noted that for 2003 through the end of August the default rate is 4.2% which gives an annualized rate of just over 6%, well down from 16.4% for all of 2002. From Jan. 1 to Aug. 31 this year there were $27.7 billion of defaults from 74 issuers.

As far as recoveries are concerned, not only are the rates better but investors lost little additional due to the default, Fitch said.

The recovery rate of 40% was calculated using the price of defaulted bonds one month after default as a measure of recovery value. Excluding fallen angels made no difference to the figure.

The year-to-date recovery rate compares with 22% of par in 2002 or 26% excluding fallen angels and 30% of par in 2001 or 15% excluding fallen angels.

Fitch also noted that issues that defaulted during 2003 were trading at a weighted average price of 41% of par at the start of the year.

"Therefore, on a mark to market basis, defaults did not cause the par value of the bonds affected by the defaults to erode much more than their distressed trading levels at the beginning of the year," Fitch commented.

The shrinking number of telecommunications defaults has helped recovery rates, Fitch said.

But even excluding telecom issues there has been an improvement. Through August, the 2003 rate excluding telecoms is 45% compared to 34% for 2002.

Also influencing the improvement in recovery rates is likely greater confidence in economic growth, more investor appetite for distressed and defaulted issues and the large proportion of utility and healthcare issuers in 2003's defaults. Both sectors have produced recovery rates above 50% of par.

Fitch's default index is based on the U.S., dollar denominated, non-convertible, speculative-grade bond market (the rating equivalent of BB+ and below, rated by Fitch or one of the two other major rating agencies). Fitch includes rated and non-rated, public bonds and private placements with Rule 144A registration rights. Defaults include missed coupon or principal payments, bankruptcy or distressed exchanges. Default rates are calculated by dividing the volume of defaulted debt by the average principal volume outstanding for the period under observation.

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