Press Release
March 15, 2001
NEW YORK, NY -- On the heels of a record setting $27.9 billion in default volume for the year 2000, high yield
defaults soared to $12.8 billion for the first two months of 2001.
February produced $9.4 billion in defaults, driving the LTM high yield default rate to 6.7% compared to 5.3% in
January. Prominent defaults for the month of February included satellite telecommunication provider, Globalstar,
banana producer, Chiquita Brands, and California utility giant, Southern California Edison. Excluding SoCal Edison
and its precipitous fall from investment grade to high yield to default in less than three months, default volume
for February totaled $4.4 billion. An unprecedented string of defaults by fallen angels (companies rated investment
grade one year prior to default) including SoCal Edison began to unfold in 2000 and, as forecast by Fitch, is continuing
this year. In the first week of March, fallen angel Finova Capital filed for Chapter 11 protection, placing an
additional $6 billion of bonds in default. Excluding fallen angels, the LTM high yield default rate through February
stood at 5.4% compared to 4.6% for full year 2000. Finova and additional defaults through the second week of March,
suggest that the first quarter of 2001 will mark the biggest cluster of defaults ever witnessed by the U.S. corporate
bond market, surpassing $20 billion.
For the first two months of the year defaults varied across a dozen industry sectors. The default by SoCal Edison
ended a winning streak for utilities which carried one of the lowest industry default rates for the period 1980-2000,
an annual average of slightly above 1% for the twenty-one year period compared to a market default rate of 3.4%.
Following utilities, telecommunication, a sector that is certainly under great scrutiny these days, produced the
second biggest volume of defaults in the first two months of the year, $2.4 billion. Food, beverage & tobacco
and leisure & entertainment each also experienced more than a billion in defaults through February. Excluding
SoCal Edison, time to default continued to hover around three years and the average price of defaulted bonds one
month following default (the standard measure of recovery) fell to approximately 20% reflecting not only credit-specific
factors but also the steep drop in company valuations in the capital markets and a supply-demand imbalance for
defaulted/distressed paper. The low recovery rates in 2000 (Fitch calculated an average recovery rate of 27% for
2000 defaulted bonds compared to a historic average of 40%) and for the first months of 2001 indicate that investors
are suffering through a period of record losses.
Fitch believes that while more defaults will likely develop from the 1997-1998 issuance class, the economic slowdown
which has begun to unfold this year, exacerbated by continuing risk aversion in the credit markets, now poses the
greatest risk for increased defaults. Although the U.S. economy is not in a recession and the banking system is
healthy compared to the early 90's, a confluence of factors, including asbestos, the utility crisis in California,
poor credit quality residing in deals brought to market in 1997-1998, and the generally larger size of defaulting
companies, will likely result in default rates this year that will challenge levels seen in the early 90's.
Overview of the Fitch High Yield Default Index:
Fitch's default index is based on the U.S., dollar-denominated, non-convertible, speculative grade bond market
(the rating equivalent of BB+ and below). Fitch includes rated and non-rated, public bonds and private placements
with 144A registration rights. Defaults include missed coupon or principal payments, bankruptcy, or distressed
exchanges. Default rates are calculated by dividing the volume of defaulted debt by the average principal volume
outstanding for the period.
Fitch's high yield default studies are available on Fitch's web site at 'www.fitchratings.com'.
----------------------------------------------
Contact:
Fitch, New York
Analysts:
Mariarosa Verde, 212/908-0791
or
Robert Grossman, 212/908-0535
or
Paul Mancuso, 212/908-0225
or
Media Relations:
James Jockle, 212/908-0547