U.S. high-yield defaults fall to 5% in 2003, Fitch says

New York, Jan. 15 - The U.S. high-yield default rate fell to 5% in 2003, less than one third of the "extraordinary" 16.4% rate in 2002, Fitch Ratings said.

In the last three months of the year, the pace "slowed to a crawl," Fitch added, saying there were just $3.4 billion of defaults, bringing the year's total to $33.8 billion.

The decline in defaults took the full-year figure to below the long-term average of 6% - although the rating agency noted that the long-term rate reflects just four years with rates above 6% since 1980 (1990, 1991, 2001 and 2002) and 13 years at 2% or lower.

"Therefore, while 2003's 5% default rate represents a vast improvement relative to the previous two years, it's still emblematic of a market with a high level of credit risk," Fitch said in a news release.

Fitch added that it expects defaults to continue to decline in 2004 thanks to the rebound in the domestic economy, improving corporate profitability and stronger balance sheets.

"The refinancing wave of the past year, in particular, has done much to ease debt burdens for high yield companies," Fitch commented.

However the market is still some way from reaching the 2% default level. Of all outstanding issues, 18% are rated CCC or lower, Fitch said, and this "high risk" sector saw "negligible" upgrade activity during the year.

Overall 2003 saw 100 issuers default on $33.8 billion of bonds, Fitch said, down from 163 issuers and $109.8 billion in 2002 and 173 issuers and $78.2 billion in 2001.

Telecommunications led the 2003 defaults with $8.9 billion or a rate of 11%, utilities with $5.9 billion or a rate of 9.8%, healthcare and pharmaceutical with $3.9 billion or 12.3%, transportation with $2 billion or 8.8% and energy with $2 billion or 2.8%.

The top defaults were Mirant at $3.2 billion, HealthSouth Corp. at $2.8 billion, Petroleum Geo-Services ASA at $1.5 billion, Fleming Cos. Inc. at $1.2 billion, NorthWestern Corp. at $1.2 billion, WestPoint Stevens at $1 billion, Leap Wireless at $0.9 billion and Magellan Health Services at $0.9 billion.

The recovery rate for 2003 was 44%, double the 22% rate in 2002. The improved economic and credit climate boosted distressed company valuations and there were generally fewer defaults in industries with deep structural problems such as telecommunication, Fitch explained.

Investors lost negligible incremental dollars on the year's defaults, Fitch said. Defaulted issues in 2003 were trading at an average of 44% of par at the beginning of the year. One month after default - the point at which Fitch measures recovery value - the year's defaulted issues continued to trade at an average of 44%.

Fitch's default index includes U.S., dollar denominated, non-convertible, speculative-grade bonds (the 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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