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U.S. High Yield Default Volume Drops to Pre-Pandemic Levels, Says Fitch

Date: Sep 15, 2020 @ 08:00 AM
Filed Under: Industry News

U.S. high yield default activity produced a modest $2.8 billion of volume since the end of July, the lowest level since the start of the coronavirus pandemic, according to a new Fitch Ratings report.

"The TTM default rate stands at 5.7%, up from 2.9% at the end of March. It is expected to finish this month at the same level or lower," said Eric Rosenthal, Senior Director of Leveraged Finance. "This month there are a couple of distressed debt exchanges scheduled to wrap, but volume will likely fall slightly below last September's $1.5 billion."

YTD default volume tallies $57 billion - a 4.4% default rate. It would require another $8 billion to reach the low end of our 5% forecast for YE 2020 and roughly $22 billion to hit the high end of our 6% forecast. Fitch expects the default rate to finish this year at the higher end of the 5% to 6% forecasted for YE 2020.

The energy TTM default rate stands at 14.8% following August defaults from Martin Midstream Partners, Chaparral Energy and Pride International. Potential near-term energy defaults include Summit Midstream Partners, Great Western Petroleum and Oasis Petroleum.

Energy accounts for 37% of the YTD volume, with the default rate expected to climb to 17% by year-end.

The leisure/entertainment TTM default rate is at 14.4% following Carlson Travel's distressed debt exchange (the small size of the leisure/entertainment sector makes for large swings in rate from a single default), and the building/material TTM default rate is at 3.9% after Omnimax International's and Hardwoods Acquisition's missed payments. Leisure/entertainment accounts for 10% of Fitch's Top Bonds of Concern total, the second highest sector behind energy (54%).

Fitch's Top Bonds of Concern list volume fell to $24.3 billion, the lowest level in over a year. The Top list has declined for four straight months and is down 54% from its May peak. The combined Top Bonds and Tier 2 list total is $215.3 billion, which has more than doubled since the pandemic began, comprising 16% of the index. The Tier 2 Bonds of Concern list climbed 5% from last month, driven by additional issuance from existing Tier 2 names.

High yield issuance registered $51 billion last month, nearly reaching the record $54 billion set in June.

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