High yield defaults set record in first quarter, Fitch says

New York, April 17 - High yield defaults set a record in the first quarter with total volume of $26.3 billion, Fitch Ratings said Wednesday.

For the first three months of the year, 4.9% of bonds defaulted, a figure that is also the highest ever.

The trailing 12 month default rate rose to 13.6%, up from 13.2% in February. Excluding fallen angels, the figures are 12% and 10.8% respectively.

During the quarter, 55 issuers failed to meet their obligations, compared with 42 in the first quarter of 2001.

Of the 2002 first quarter total, telecommunications companies accounted for 15, up from eight a year earlier. Among the $11.9 billion of telecom defaults were Global Crossing, McLeod USA, Adelphia Business Solutions, Nextel International, Fitch said. The rating agency anticipates there will be a further $10 billion of telecom defaults in the next six months.

Other major defaults in the quarter were Kmart, United Pan-Europe Communications, Huntsman Chemicals, and Kaiser Aluminum and Chemicals.

The Argentinean crisis led to $1.8 billion of defaults on yankee issues including Cablevision SA and Multicanal.

Although the default rate increase, Fitch noted that dollar losses were "actually quite low."

The weighted average price of defaulted issues in the first quarter was 24.2% of par but the average price for the quarter's defaulted issues at the beginning of the year was only 26.7% of par. That means investors suffered only suffered marginal incremental losses on the first quarter defaults on a mark-to-market basis. In particular, telecom bonds fell to 12.4% on default from 12.7% at the beginning of the year.

This data indicates that "there continues to be a purging of weak credits from the high yield market, especially from the now notorious 1997-1999 issue pool" which made up 68% of the quarter's defaulted bond volume, Fitch said.

The par recovery rate of 24.2% was also an improvement from the 15% average recovery rate for 2001 and higher than any single quarter in 2001, even including the deeply discounted telecom issues, Fitch added.

Sectors with defaults above 10% in the first quarter were metals and mining with a rate of 15.4% on default volume of $2 billion, telecommunication at 14.1% on $11.9 billion, retail at 11.9% on $2.6 billion, and textile and furniture at 11.2% on $1 billion.

Fitch said it anticipates defaults will finish the year "in excess of 8%."

The Fitch high yield default figures cover U.S., dollar denominated, non-convertible, speculative-grade bonds, including rated and non-rated and public bonds and private placements with Rule 144A registration rights. Defaults include missed coupon or principal payments, bankruptcy or distressed exchanges.

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