Fitch U.S. junk bond default rate ends May at 2.3%; June drop expected

By Caroline Salls

Pittsburgh, June 15 – Fitch Ratings’ trailing-12-month U.S. high-yield bond default rate finished May at 2.3%, its lowest level since June 2015, and is primed to drop further in June, according to a report released Thursday.

Nevertheless, Fitch said it expects the default rate to end the year at just below 3%.

Although both GenOn Energy Inc. and Gymboree Corp. filed for bankruptcy this week, the ratings agency said the total amount of high-yield debt defaulting in June is likely to be less than the $3.4 billion amount leaving the trailing-12-month universe.

“With the trailing-12-month high-yield bond default rate likely falling for the sixth straight month, there has also been improvement in 30-day post-default prices,” Fitch’s Eric Rosenthal said in the release.

“Since the start of the year, the 30-day post-default price is at 68%, above the 47% non-recessionary average.”

Fitch said the energy default rate fell to 7.9% in May, well below its January peak of 19.7%. Fitch expects the rate will fall below 5% by the end of July and will settle around 2.5% by year-end.

While retail remains the sector to watch, Fitch said the default rate is highly dependent on defaults from Claire’s Stores Inc. and Sears Holdings Corp.

Specifically, the ratings agency forecasts a 9% retail default rate by year-end, including defaults from both. Without defaults from Claire’s and Sears, Fitch said the rate will likely be closer to 4%.

iHeartCommunications, Inc. also remains a name to watch, the release said, particularly after extending its debt exchange deadline for the sixth time last week.

Fitch said iHeart has a $90 million interest payment due on June 15 followed by another payment scheduled for August. Fitch believes a bankruptcy filing is likely and would add 0.8% to the overall default rate if/when it occurs.

The broadcasting and media default rate would rise to almost 18% from iHeart’s $9.5 billion of volume, Fitch said.

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