Defaults rise in April, Moody's says; Fitch sees record pace, excluding fallen angels

By Peter Heap

New York, May 15 - The worldwide default rate for high-yield bonds rose to 10.4% in April from 10.3% in March, led by troubles in telecommunications, Moody's Investors Service said Wednesday.

The increase came after two months of declines but the rating agency said its model still predicts defaults will continue to fall to near 8% by the end of the year and 7.1% in April 2003.

Meanwhile, Fitch Ratings said its U.S. high-yield default rate was 13.3% in April, remaining in the range of 13% to 14% where it has firmly resided since December. Excluding fallen angels, the trailing 12-month default rate was 12.3% in April, a new high for traditional high yield defaults.

"Although we're starting to see improvement in aggregate credit quality, the high incidence of rating downgrades in the first quarter suggests that near-term default risk is still high, particularly in sectors like telecom and technology," said David Hamilton, Moody's director of default research, in a news release announcing his rating agency's data. "We do think that we've passed the peak in the default rate, however, and that the rate should fall for the foreseeable future."

Of the total default volume for the month, 88% or $15.7 billion was from telecommunications, including the top three failures to pay. Biggest was NTL Communications Corp. with $8.5 billion followed by Williams Communications Group, Inc. with $3 billion and Call-Net Enterprises, Inc. at $2.2 billion.

In total 13 corporate bond issuer worldwide defaulted on $17.8 billion of bonds in April compared to $10.2 billion of defaults by 19 firms in March, Moody's said.

Among U.S. issuers, the high-yield default rate dropped to 10.9% in April from 11.3% in March. In the month seven issuers defaulted on $4.6 billion of bonds.

Outside the U.S., the rate rose to 9.1% in April from 8% in March. In the month, six issuers defaulted on $13.2 billion of bonds.

By Fitch's data, which covers the U.S., there were $8.2 billion of defaults in April bringing the total defaults for the first four months of 2002 to $34.5 billion, 6.3% of all high-yield bonds. By comparison, there were $33.3 billion of defaults in the first four months of 2001.

Unlike the first four months of 2001, when just over half (almost $17 billion) of the total was fallen angels, defaults in 2002 have been predominantly original-issue speculative-grade companies, Fitch said.

Telecom defaults are particularly prominent, accounting for $18 billion through April compared to $28.2 billion for all of 2001, Fitch said.

Next largest is metals and mining with $2.6 billion, a 19% year-to-date default rate for the sector.

Fitch noted that the default rate for high-yield telecoms in April was 20.4% reflecting both the high volume of defaults and the rapidly shrinking size of the sector.

At the end of April, the outstanding par value of performing telecom bonds was only $63 billion, approximately 13% of the overall high yield market, compared to more than $100 billion par value at the beginning of 2001, approximately 20% of the overall market.

This reduction is entirely due to defaults, Fitch said, adding that the high yield market overall has also shrunk due to defaults.

"The excessive level of defaults in the past several years (an astonishing $113 billion since January 2001) has actually caused the size of the performing high yield bond market as a whole to shrink," Fitch said. "This despite strong issuance in 2001 and in the first months of 2002."

Prominent defaults in April included telecom service providers Call-Net Enterprises, Williams Communications and Flag Telecom, mining company Doe Run Resources and manufacturer Anchor Glass Container.

In total, 16 issuers defaulted on 27 bond issues.

Fitch said May will add nearly $10 billion to the total, mostly from defaults by Metromedia Fiber Network and NTL.

Fitch's default data covers U.S., dollar-denominated, non-convertible, speculative-grade bonds, including 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.

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