U.S. default rate drops to 7.4% in September, Fitch says

New York, Oct. 23 - The U.S. high yield default rate fell to 7.4% for the 12 months ending in September, down from 7.7% for the 12 months to August, according to Fitch Ratings.

September saw $2.7 billion in high yield defaults, bringing the year-to-date total to $30.4 billion from 84 issuers Fitch added. The biggest in the month was NorthWestern Corp.'s bankruptcy filing, affecting $1.2 billion in bonds.

Fitch noted that while defaults are down substantially relative to 2002 they have essentially moved sideways for much of this year.

Although credit erosion has in fact slowed this year, upgrades have generally remained elusive, Fitch explained.

Defaults may stay around current levels until there is a sustainable improvement in operating earnings or leverage measures improve through equity issuance, mergers or other strategic efforts aimed at reducing debt, the rating agency added.

At the end of September, approximately 17% of U.S. high yield bonds carried ratings of CCC or lower.

Compared to the same period of 2002, year-to-date defaults are down 66% by volume and 38% by number of issuers, Fitch said.

The third quarter saw $12.5 billion of defaults, up slightly from $11.3 billion in the second quarter although the number of issuers fell to 27 from 31.

Mirant remains the biggest default so far this year at $3.2 billion, followed by HealthSouth at $2.8 billion, Petroleum Geo-Services at $1.5 billion, Fleming at $1.2 billion, NorthWestern at $1.2 billion, WestPoint Stevens at $1 billion, Leap Wireless at $0.9 billion, Magellan Health Services at $0.9 billion, American Cellular Corp. at $0.7 billion and Lumbermens Mutual Casualty at $0.7 billion.

The weighted average recovery rate for the first nine months of the year is 42% of par, Fitch said.

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 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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