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Late Stage Credit Data Healthier Than Prior Cycles; Defaults to Remain Low

June 05, 2018, 07:10 AM
Filed Under: Credit

As the credit cycle enters its late stage, key metrics are stronger than before the start of prior recessions, pointing towards a lower expected default rate in the near term, according to a new Fitch Ratings report.

"We're seeing better trends when compared to the 2001-2002 and 2008-2009 recessions," said Eric Rosenthal, Senior Director of Leveraged Finance. "The high yield default rate should remain low through 2019."

At 4%, the U.S. high yield distress ratio is below the 10% levels seen in third-quarter 1999 and in late 2007. The latest U.S. Federal Reserve Senior Loan Officer Survey revealed more loosening, as opposed to the tightening C&I lending standards before the 2001-2002 and 2008-2009 recessions.

In addition, real GDP is improving compared to prior recessionary periods; current 'CCC' issues are at 13%, a low point when compared to 22% in 2007 and 36% in 2008.

This cycle is reminiscent of 2006-2007, with a strong economy, open leveraged finance markets and a low default environment. Nevertheless, leverage continues to climb, along with weakening loan documentation and anticipated interest rate hikes.

Fitch's 2% high yield forecast for 2018 is in line with the non-recessionary 2.3% average versus the 12.9% recessionary average encompassing 2001-2002 and 2008-2009.

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