In a report on the corporate bond market for the third quarter of 2011, Fitch Ratings noted that the trend toward ratings upgrades, or what the agency terms “positive rating drift,” came to an abrupt halt as a new surge in financial sector downgrades pushed up the share of the market downgraded to 2 percent (on $73.8 billion) from 0.7 percent in the second quarter. Simultaneously, volatility associated with the European debt crisis affected issuance and economic activity—upgrades contracted to 1 percent of market volume (on $37.8 billion) from 2.5 percent in the prior quarter.
U.S. corporate bond issuance dropped significantly to $133.3 billion in the third
quarter. This represents the lowest amount issued in over a year and a 33 percent drop from the second to the third quarter. Fitch observes that sovereign debt concerns coupled with negative economic news caused the interruption. Notably, the worse the credit, the lower the issuance. At the speculative grade level (volume was down 71 percent quarter over quarter, with ‘CCC’ issuance practically absent).
The par-weighted average coupon of investment grade industrial bonds sold in the third quarter was 3.5 percent versus 4.1 percent in the second quarter. On far more limited activity, the par-weighted average speculative grade coupon rose to 8.3 percent from 7.6 percent in the second quarter.
Of course, finding a bond selling at par in the secondary market is extremely difficult as long as the Federal Reserve Board pledges to hold the overnight lending rate near zero. This makes yield very hard to come by in the bond market, and is in part what is driving money toward equities, even though the risk is much higher. However, the recent spate of downgrades, coupled with what should be an outflow of money from bonds to chase higher stock prices, may bring selective opportunities in corporate bonds. Like with equities, one must perform due diligence and not blindly buy bonds based solely on yield.
To view the Fitch Ratings report, please click the following link: Fitch 3Q 2011 Corporate Bond Report.
Gregg D. Killoren
victoria1014
High Yield Corporate Bond Defaults to Cross 1% in November 2011, Defaults Come From Low End of Ratings Spectrum: Fitch
In its October 2011 high yield default and recovery report, Fitch Ratings observes that Dynegy Inc.’s bankruptcy filing on November 7, 2011, has moved the year-to-date U.S. high yield default rate to an estimated 1.2 percent, very close to November 2010′s 1.1 percent.
Three defaults, Hovnanian Enterprises, Inc., Real Mex
Restaurants, Inc., and William Lyon Homes, affected $608.3 million in bonds in October 2011, pushing the year’s default tally to $8.5 billion and resulting in a year-to-date default rate of 0.8 percent and a trailing 12-month rate of 1.3 percent.
Nearly all defaulted issues in 2011 have originated from the very bottom of the rating scale—issues rated “CCC” or lower—a pool currently $205 billion in size. Fitch Ratings estimates that the default rate for the “CCC” universe will hit 4.6 percent for the year. A slow-growing U.S. economy, weighed down by domestic challenges and the impact of the sovereign debt crisis in Europe, is putting the most strain on highly leveraged companies.
Price patterns for “CCC”-rated bonds also show the pressure on this group. At the end of October, approximately 25 percent of “CCC” volume was trading at the distressed level of 80 percent of par or lower, higher than the share trading at that level at the beginning of the year (15 percent). The increase in the size of the distressed “CCC” pool is an important barometer of default pressures.
To view the full Fitch report, please click the following link: Fitch High Yield Default Insight – October 2011.
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Posted in Corporate Bonds, Fixed-Income, Investing, Market Commentary, Personal Finance
Tagged Corporate Bonds, Corporate Defaults, Fixed-Income Investing, High-Yield Bonds, Investing, Personal Finance