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U.S. High Yield Default Rate to Hit 5% with Imminent Energy Bankruptcies

June 12, 2020, 09:15 AM
Filed Under: Energy
Related: Energy, Fitch Ratings

The U.S. high yield default rate is poised to reach 5% in June for the first time since July 2016, up from 4.6% at May 31 driven by energy defaults, according to a new Fitch Ratings report.

"Default volume tallied a heavy $32.7 billion over the past two months," said Eric Rosenthal, Senior Director of Leveraged Finance. "The May default rate would have been higher if a few unsuccessful energy distressed debt exchange offers had come to fruition."

Energy companies Chesapeake Energy and California Resources are both considered imminent bankruptcies, facing sizable bond interest payments due in the next couple of weeks. The energy trailing 12-month default rate stands at 11.1%, and could reach 14% by June 30. Fitch Ratings projects energy to finish the year at 17%.

Fitch's Top Bonds of Concern list total fell to $45.6 billion from $52.4 billion, reflecting removal of recent defaults and Diamond Sports Group's bond exchange being viewed as opportunistic. The combined Top Bonds and Tier 2 list total is $227.5 billion, which has more than doubled since the pandemic began and now comprises 17% of the high yield index.

In March, we raised our 2020 base case default forecast to 5%-6%, with a severe case default rate of 7%-10% for 2020. The high end of the severe case equates to more than $130 billion of defaults and would eclipse the record $113 billion set in 2009. Fitch expects a 7%-8% base case default rate for 2021, or roughly $100 billion. This translates into a two-year cumulative base case default rate of about 15%.

U.S. high yield volume registered $153 billion at the end of May, edging the mark set back in 2015 and up 69% compared with the same period as last year. May issuance tallied $42 billion, surpassing the previous high in March 2017 of $41 billion.

Pandemic-related fallen angels have been the main growth driver for the high yield universe, which reached a record $1.34 trillion from $1.31 trillion on April 30. The universe has grown 15% since the start of the year.

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