U.S. junk defaults fall to 1.1% in March, Fitch says

New York, April 14 - U.S. high-yield bond defaults fell to 1.1% for the 12 months ended in March, down from 1.5% for all of 2004, according to Fitch Ratings.

The first quarter saw $1.5 billion of defaults from seven issuers. The dollar amount was down 61% compared to a year earlier, the rating agency said.

But Fitch also warned about the high concentration of issues rated CCC and lower in the high-yield market.

At the end of March, 16% of outstanding junk bonds or nearly $110 billion were in that low rating category.

In addition, the quarter had slightly more downgrades than upgrades on a par basis, reversing the trend of the previous three quarters when upgrades had beaten downgrades.

"While current economic conditions remain solid and support below average default rates, the market's considerable concentration of low rated issues suggests heightened sensitivity to adverse conditions of any kind," said Mariarosa Verde, managing director, credit market research at Fitch Ratings, in a news release. "The most significant risks include rising oil prices and the possibility of a slowdown in consumer spending prompted by higher interest rates."

A further concern is "aggressive" new issuance in the first quarter, Fitch said, pointing to an accelerating trend of deals to fund acquisitions and leveraged buyouts. By comparison, the issuance boom of 2002 to 2004 was mostly for refinancing, which generally helped issuers by strengthening their balance sheets.

Recoveries remained strong at 62% in the first quarter, Fitch added.

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