The fundamentals are unchanged for growth of the EMEA high-yield bond market – but current market turmoil shows the road will be bumpy, according to Moody’s.
Highlights from Moody’s Special Comment. (Premium):
- The fundamental drivers for increasing bank disintermediation remain intact, despite the current turmoil in the capital markets and the apparent recovery of bank risk appetite.
- Adequacy of funding liquidity remains a key credit and rating driver for many high-yield companies, which need to remain cognisant that market access can dry up, as they consider their refinancing plans
- Although Moody’s forecasts that the Europe, Middle East and Africa (EMEA) high-yield default rate will fall to 2.5% in the next 12 months from 9.6% in January 2010, a period of reduced capital market access is an important factor that could contribute to a more pessimistic downside forecast of 7%.
Following some recovery in Q4 2009 and the early part of January, the EMEA capital markets are currently in a period of turmoil as a spillover from concerns over sovereign creditworthiness and possible longer-term implications for the financial structure of the EU.
Technorati Tags: EMEA, high-yield, junk-bonds
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Technorati Tags: big banks, BPA, commercial-real-estate, ETF, foreclosures, jobs, junk-bonds, mortgage-backed-securities, venture-capital
The trailing 12-month global speculative-grade default rate finished at 12.5% in the fourth quarter of 2009, down slightly from 12.6% in the previous quarter, according to Moody’s. The global default rate peaked in November at 12.9%, which surpassed 2001’s peak of 10.4% and 1991’s peak of 12.2%. A year ago, the global default rate stood at 4.2%.
The ratings agency’s default rate forecasting model now predicts that the global speculative-grade default rate will fall sharply over the next year to 3.3% by the end of the fourth quarter.
The pace of the decline is expected to be more rapid in the first half of the year with the default rate falling to 6.4% by the end of June.
Under its baseline scenario, Moody’s forecasting model now predicts that the default rate for U.S. speculative-grade issuers will drop to 3.6% by the end of 2010. Meanwhile, the European speculative-grade default rate is expected to drop to 2.7% by the end of the year.
Across industries over the coming year, default rates are expected to be highest in the Consumer Transportation sector in the U.S. and the Business Service sector in Europe.
Moody’s speculative-grade corporate distress index — which measures the percentage of rated issuers that have debt trading at distressed levels — came in at 18.8% at the end of the fourth quarter, down from 28.5% in the previous quarter. A year ago, the index stood much higher at 54.1%.
The trailing 12-month U.S. leveraged loan default rate finished the fourth quarter at 11.6%, up from 10.5% in the previous quarter but down from November’s peak of 11.7%. In 2008, the U.S. loan default rate ended at 3.4%.
More details available here (Premium)
Technorati Tags: corporate-default, junk-bonds, speculative-grade-bonds
Between 55 and 75 Western European companies with speculative-grade credit ratings could default in 2010, representing a default rate of between 8.7% and 11.1%, according to Standard & Poor’s Ratings Services.
“While the annual default rate is likely to have peaked at 13.1% in the third quarter of 2009, we expect it to continue to run at more than double its historic average throughout 2010, as the slow pace of economic recovery is likely to be insufficient to save many highly leveraged and poorly performing companies.”
Weak capital spending prospects by European companies, coupled with a likely further rise in unemployment, continued weakness in regional housing markets, ongoing tight lending conditions by banks, the threat of rising interest rates and taxes, and a strengthening euro present a tough challenge for corporate credit quality in 2010.
The report outlines S&P’s predictions for credit quality in 2010 in the European banking, corporate, insurance, and leveraged finance sectors.
The sectors that have the greatest vulnerability to default (with a disproportionate percentage of ratings at ‘B-’ or below) are, in descending order, telecommunications services, chemicals, hotels and gaming, energy, transportation, and consumer products.
For details see: A Tepid Recovery Will Strain European Corporate Credit Quality In 2010 (Premium)
Technorati Tags: corporate-default, Europe, junk-bonds, speculative-grade-bonds
Companies to vie for lenders’ attention as $800bn wave of debt comes due in next five years.
Excerpts from Refinancing the Buyout Boom: Profiles of Select Leveraged Credits (complimentary download)
In the next five years, an unprecedented amount of leveraged loan and high yield bond debt comes due. Each dollar of the more than $800 billion in debt maturing in this period will need to be addressed on a company-by-company and highly negotiated basis.
Many, if not all, of the companies that issued such debt have seen deteriorating operations while the credit markets remain selective. Furthermore, maturity
concentration ensures that many companies will be vying for lenders’ dollars and attention over the next several years. As a result, upcoming maturities will remain the
largest medium-term overhang to those highly leveraged credits that incurred a significant amount of debt (notes and loans) as a result of LBOs in 2005-2007.
Fitch Ratings believes that managing these maturities will be among the primary issues facing these companies over the next several years. Alternatives include: 1) repayment from cash flow (operations or asset sales); 2) refinancing in the bank or bond market; 3) retirement from IPO proceeds; 4) debt exchanges; or 5) bankruptcy court.
Fitch believes the fight for liquidity and solvency will be won or lost based on individual business risk characteristics, prospects for growth, features/restrictions within debt agreements.
In this report, Fitch provides an in-depth analysis of nine ‘B’ and ‘CCC’ category companies in Fitch’s rated universe that represent over $100 billion in total debt across
six sectors, and presents detailed assessments of their capital structures, financial covenant flexibility, and recovery prospects.
The companies profiled are: ARAMARK Corporation ; Energy Future Holdings Corp. ; First Data Corporation; Freescale Semiconductor, Inc.; HCA Inc,;The Nielsen Company B.V.; SunGard Data Systems Inc.; Toys “R” Us, Inc.; and Univision Communications, Inc.
In conducting its analysis, Fitch made the following key observations:
- Although most of the companies have generated free cash flow during the downturn and are expected to continue to do so, it will fall far short of the amount necessaryto repay maturing loans, requiring refinancing and/or negotiating with lenders.
- Although the companies profiled here do not compete with one another in their core businesses, they will compete for a potentially limited supply of debt capital over the coming years.
- Fitch does not expect the institutional loan market to be able to absorb all of the institutional loan debt that comes due during the next five years. The high yield bond market will likely expand to absorb a portion, but its capacity could be stressed by the absolute volume of debt that comes due in this period.
This report has been made available free of charge to Research Recap users for 30 days by special arrangement with Fitch Ratings, an Alacra content partner. After 30 days, the report will revert to its regular AlacraStore price of $275.
Technorati Tags: Aramark Corporation, Energy Future Holding Corp., First Data Corporation, Freescale Semiconductor, HCA Inc., high-yield, Inc., junk-bonds, leveraged finance, leveraged-loans, SunGard Data Systems Inc., The Neilsen Company, Toys "R" Us, Univision Communications
Globally, 57 companies (50 public and seven confidentially rated) defaulted in the third quarter of 2009, bringing the year-to-date total to 225, according to Standard & Poor’s.The volume of rated debt affected by defaulters in the third quarter was $126.9 billion, with the U.S. region (the U.S., Bermuda, and the Cayman Islands) accounting for nearly 82%.
The quarterly corporate default rate for speculative-grade-rated entities was 2.1% at the end of third-quarter 2009, compared with 0.77% at the same time in 2008.
On a trailing-12-month basis, the global speculative-grade default rate as of Sept. 30, 2009, reached an 82-month high of 9.58%.
In the first nine months of the year, the number of global defaults exceeds the total for 2008, and it’s on track to eclipse the previous high of 229 in 2001 – Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group.
For a details, see “Quarterly Default Update And Rating Transitions (Premium).”
Technorati Tags: corporate defaults, corporate-debt, junk-bonds, speculative-grade-bonds
Moody’s says global speculative-grade default rate will rise to a peak of 12.5% in the fourth quarter of this year and then decline sharply to 4.5% a year from now.
Excerpts from Moody’s “September Default Report”
The trailing 12-month global speculative-grade default rate finished at 12.0% in the third quarter of 2009, up from a level of 10.6% in the previous quarter and only 2.8% a year ago.
The U.S. speculative-grade default rate ended the third quarter at 12.9%, up from 11.5% in the second quarter, while in Europe the default rate rose to 9.3% from 6.4%. At this time last year, the U.S. and European default rates stood at 3.2% and 0.7%, respectively.
In all, a total of 50 Moody’s-rated corporate debt issuers defaulted in the third quarter, down from 89 in the first quarter and 83 in the second quarter. Last year, only 62 defaults were recorded in the first three quarters of the year.
For U.S. speculative-grade issuers, Moody’s forecasting model predicts that the default rate will peak at 13.5% in the fourth quarter before declining sharply to 4.4% by the third quarter of 2010.
Overall, the Automotive industry was the worst performer in the third quarter as seven companies in that sector defaulted. The Advertising/Publishing/Printing Media industry followed closely behind with six defaults. Across regions, 39 of the Q3 defaulters were based in North America while eight were from Europe. The remaining defaulters were domiciled in South America and Asia.
Across industries over the coming year, Moody’s default rate forecasting model indicates that the Consumer Transportation sector will be the most troubled in the U.S. and the Durable Consumer Goods sector will have the highest default rate in Europe.
Moody’s speculative-grade corporate distress index — which measures the percentage of rated issuers that have debt trading at distressed levels — stood at 28.1% at the end of the third quarter, down from 36.3% in the previous quarter. A year ago, the index stood at 26.8%.
Technorati Tags: corporate-default, credit-markets, junk-bonds, speculative-grade-bonds
Ratings agency expects default rate to decline after November.
Moody’s Liquidity-Stress Index continued to fall in September and at 14.0%, was down more than three percentage points for the quarter. This is the lowest that the Liquidity- Stress Index has been since October 2008’s level of 13.9%, said Moody’s in its latest “SGL Monitor Flash” report.
The sharp drop in the LSI highlights a trend of meaningful improvement in liquidity among speculative-grade corporate issuers, and offers more evidence that the default rate is likely to decline after November 2009.
The number of lowest-rated SGL-4 issuers fell last month to 72 from 78, down 32% from a peak of 106 at the end of March. SGL upgrades outnumbered downgrades by 5 to 1 in September, as refinancing, cash conservation and new debt continued to give issuers more breathing room.Overall, there have been 48 SGL upgrades and 22 downgrades since May 2009.
[Standard & Poor's said the junk bond default rate in the U.S. fell for the first time this year, coming in at an estimated 9.36% in September.]
Technorati Tags: corporate-default, credit-markets, junk-bonds, speculative-grade-bonds
But Standard & Poor’s sees continued deterioration of credit quality and restricted lending conditions.
Excerpts from Default, Transition, and Recovery: U.S. Credit Metrics Monthly: Default Rate Recedes In September
The speculative-grade default rate in the U.S. has fallen for the first time this year, coming in at an estimated 9.36% in September. However, credit metrics in the U.S. show continued deterioration of credit quality and restricted lending conditions, contrasted with signs of life among new issuance.
- The number of corporate defaults in 2009 slowed markedly in the U.S. in September, totaling eight during the month. This brings the year-to-date total to 155. The defaults in September are attributable to five nonfinancial sectors.
- The preliminary estimate for the U.S. 12-month-trailing speculative-grade default rate in September is 9.36% (subject to revision), down from the 10.4% in August and the first decline in the default rate this year.
We expect the speculative-grade default rate to escalate to a mean forecast of 13.9% by August 2010, but it could reach as high as 18% if economic conditions are worse than expected.
Technorati Tags: corporate-default, credit-markets, junk-bonds, speculative-grade-bonds
Financial, media and high tech sector distress levels remain above normal.
Excerpts from U.S. Distressed Debt Monitor: Distress Ratio Declines Slightly In September (Premium)
Continuing its descent in 2009, Standard & Poor’s distress ratio has hit another low this year, reaching 23.5% as of Sept. 15, down from 25.3% in August. The decrease in distress is coincident with movement in corporate bond spreads. Distressed credits are speculative-grade-rated issues that have option-adjusted spreads of more than 1,000 basis points (bps) relative to Treasuries.
Highlights from this month’s distressed credit report are:
- The bank, insurance, media and entertainment, and high technology sectors are posting distress ratios in excess of their traditional, issue-based distress measures.
- Following alongside the recent activity in the corporate universe, distress in leveraged loans has experienced a slight decrease as well, with the S&P/LSTA Leveraged Loan Index distress ratio falling to 31.1% in August from 34% in July.
- Among distressed bonds, the total number of companies with issues trading with spreads of 1,000 bps and higher is currently 193, down from 208 in August.
With distress still at elevated levels, recovery prospects remain low.
- In September, 72% of all distressed issues fall into the lowest rating categories (’5′ or ‘6′), indicating only negligible to modest recovery in the event of default. In addition, 85% of all distressed issues are either unsecured or subordinated notes. Holders of those notes have claims to a firm’s assets that are secondary to more senior debtholders in the event of default.
- With a decrease in the distress ratio, the amount of affected debt also fell–to $101.9 billion from $116.4 billion in August. Based on debt volume, the finance companies, media and entertainment, and high technology sectors together accounted for 52.2% of the total debt outstanding.
Technorati Tags: distressed credits, junk-bonds, leveraged-loans, speculative-grade-bonds
