Raw Finance

According to a new report, U.S. High Yield Default and Recovery Rates 2009 Review and Outlook, published by Fitch Ratings, the U.S. high yield default rate ended 2009 at 13.7 percent on $118.6 billion in defaults, and the year’s weighted average recovery rate was 34.1 percent of par for a dollar loss on the year’s bond defaults of $78 billion. Recovery rates fluctuated dramatically over the course of the year and showed substantial variability by credit and sector.

In the first half of 2009 the weighted average recovery rate was just 21.8 percent of par with a median of 17.4 percent. In the second half the weighted average recovery rate nearly tripled to 59 percent and the median rose to 42 percent.

The distribution of recoveries overall was strongly skewed with 29 percent of the year’s defaulted bonds experiencing recovery rates of 0 percent to 10 percent of par and another 28 percent experiencing recoveries of 11 percent to 30 percent of par.

Sectors facing systemic industry problems experienced grim recoveries. The weighted average recovery rate on broadcasting and media defaults was just 11.8 percent of par. Automotive defaults registered a similarly bleak weighted average recovery rate of 15.3 percent of par.

Issuers in Fitch’s U.S. High Yield Default Index with outstanding loans at the time of default experienced an average loan recovery rate of 59.6 percent in 2009 with a median of 65.5 percent.

The distribution of loan recovery rates in 2009 was worse than any other period since at least 2000 with just 43 percent of loans in Fitch’s sample experiencing recoveries of 70 percent of par or higher.

The weighted average recovery rate on the year’s secured bonds was also low at just 36.8 percent of par, with a median of 25.4 percent. This is noteworthy given that a record 42 percent ($65 billion) of high yield bonds sold in 2009 consisted of secured bonds.

“Recovery rates in 2009 were particularly weak on secured loans and bonds with levels across both categories dipping below prior recessions,” said Mariarosa Verde, Managing Director of Fitch Credit Market Research. “This provides important insight into the consequences of changing underwriting standards and evolving capital structures on credit risk. Funding trends prevalent in the years leading up the credit crisis had an adverse effect on recovery outcomes in 2009.”

On a mark to market basis, high yield bond defaults in 2009 did not cause significant incremental losses. The weighted average trading price of the year’s defaulted bonds was already down to 35.9 percent at the start of the year before falling to 34.1 percent shortly after default. (Fitch’s measure of recovery is the price of the defaulted instruments 30 days after default.)

The fear factor ran so deep in late 2008 that the market essentially priced in all of the year’s defaults. However, the powerful high yield rally of 2009 may bring its own challenges as defaults going forward will occur from higher price points.

Fitch’s forecast is for a high yield default rate of 6-7 percent in 2010.

The combination of easy monetary policy, a far improved economic outlook and a return to more normal funding conditions has had the desired effect of helping to stem corporate credit deterioration and the pace of the defaults. However, Fitch believes significant risks linger including: persistently high system-wide leverage, the potential for numerous economic pitfalls going forward including weak consumer spending and high energy costs, record volumes of leveraged loans and bonds coming due over the next few years, and the seasoning of weaker deals brought to market from 2005 through 2007.

In 2009 a total of 151 issuers defaulted on their high yield bond obligations, up from 63 in 2008 and just 15 in 2007. The default rate swung from an all time low of 0.5 percent in 2007, to 6.8 percent in 2008, to 13.7 percent in 2009.

In dollar terms 2009 defaults were concentrated in the following sectors: banking and finance ($26.7 billion); broadcasting and media ($13.9 billion); automotive ($13.5 billion); cable ($12.6 billion); and gaming, lodging and restaurants ($10.2 billion).

“The automotive sector experienced the year’s highest industry specific default rate of 44.2 percent, and a total of ten sectors posted default rates above the full market default rate of 13.7 percent,” said Eric Rosenthal, Senior Director of Fitch Credit Market Research.

Fitch’s new study is titled ‘U.S. High Yield Default and Recovery Rates 2009 Review and Outlook’ and is available on Fitch’s web site under Credit Market Research.