Fitch: US HY Default Forecast Lowered to 5%; 3% for 2017
The YTD default total stands at $63.5 billion, and Fitch expects the figure to end 2016 at roughly $75 billion, down from the previously anticipated $90 billion. Default volume has dropped noticeably in the third quarter, with just $10.1 billion thus far, compared with $34.7 billion in the prior quarter. The August TTM default rate is at 4.9%, while the energy rate is at 15.8%.
YTD energy defaults total $37.5 billion, with $32.9 billion pertaining to E&P companies. Fitch's year-end 16%-18% energy forecast equates to roughly $42 billion-$50 billion of volume. If crude oil prices stay in the mid-$40/barrel range, the lower end of the range appears more likely.
In addition, Petroleos de Venezuela SA (PDVSA), the largest name on Fitch's Bonds of Concern list, is attempting to address its upcoming bond maturities through a voluntary exchange slated for completion on Oct. 14.
Secondary bid levels strengthened significantly from earlier in the year. Currently, $75 billion of issues are bid below 70, a striking difference from the $280 billion seen in mid-February. In addition, the high-yield distress ratio has declined for six straight months and is at its lowest level since last June, while 'CCC' rated corporate spreads have tightened more than 800 basis points since mid-February.
The 2017 3% forecast is slightly above the nonrecessionary 2.2% average and translates to roughly $45 billion of defaults. This rate would be comparable to the volume posted in 2015.
The 2017 high-yield maturity wall is relatively low, with $64 billion coming due. Furthermore, just $17 billion is rated 'CCC' or lower, which is the rating category that accounts for the vast majority of near-term defaults.
The amount of energy defaults, coupled with a lack of new issuance, caused the 'CCC' outstanding universe to fall to $242 billion (16% total market) at the end of August from $288 billion in February.
On the institutional leveraged loan front, Fitch believes the 2016 default rate will finish modestly below our 2.5% forecast and that the 2017 rate will end at 2%. The August TTM rate is at 2.2%, but September is poised to break a string of 22 months with at least one default. The 2017 projection is below the 2.8% historical average but slightly above the 2015 rate.