Default rate rises to 13.9% after $11.2 billion in June, Fitch says

New York, July 17 - The 12-month high yield default rate rose to 13.9% after $11.2 billion of defaults in June, Fitch Ratings said Wednesday.

June was the third month so far this year in which defaults have topped $10 billion, resulting in a default for just the first half of 2002 of 9.5% - meaning almost one in 10 high yield bonds have default in the six months just completed.

June's figure was inflated by Adelphia Communications Corp. which defaults on $7.6 billion of bonds, 68% of the month's total. Also failing to pay their obligations were Canada's GT Group Telecom, Dutch data network operator, Versatel Telecom and ITC^DeltaCom.

In total 15 issuers defaulted during the month bringing the year to date defaulted issuer count to 108, covering 242 bond issues.

By comparison 94 issuers defaulted in the first half of 2001.

Fitch noted that the 13.9% speculative-grade default rate falls to 12.9% if fallen angels are excluded, the latter figure being a new high.

The rating agency noted that defaults in the first half of 2002 have been predominantly original-issue speculative-grade defaults, unlike 2001 when 30% of the year's default volume of $78.2 billion consisted of fallen angel defaults.

Of the defaults in the first six months of 2002, telecom and cable accounted for $40.2 billion or 70%. Metals and mining was next at $2.8 billion and retail was third at $2.5 billion.

As percentages, the default rates were 34.4% for cable, 20.2% for telecommunications, 18% for metals and mining, 11.9% for retail and 11.1% for textiles and furniture.

The weighted average recovery rate for the first half was 29% of par, nearly double the level of 15% of par recorded in 2001 (excluding fallen angels), Fitch said.

The market value of first-half defaulted issues at the beginning of the year was 41% of par. Using the 29% of par recovery rate, investors lost an incremental $6.5 billion on first half defaults in 2002.

Of the first-half volume $15.3 billion or 27% came from issuers domiciled outside the U.S.

The volume of CCC to C rated bonds was above $100 billion at the end of June, almost entirely due to downgrades on WorldCom bonds.

"This large concentration of weak credits in a difficult operating and funding environment will keep the default rate running at a double digit rate for most of this year," Fitch commented.

Fitch added that it does not expect a marked improvement in the trailing 12-month default rate until 2003.

Fitch's default figures cover the U.S., dollar denominated, non-convertible, speculative grade bond market. Included are 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.

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