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Fitch Warns High-Yield Default Rate Set To Jump

Tyler Durden's picture




 

As every 'real' corporate bond manager knows (as opposed to playing one on television), forecasting from historical defaults is a fool's errand as the process is entirely cyclical and non-stationary.

 

The fact that default rates have been low for 4 years (thanks to an overwhelming flood of liquidity-driven demand for yield) is of absolutely no use when pricing discounted cashflows into the future. However, as Fitch warns, a jump in US high-yield default rates looms. There have been 10 LBO related bond defaults thus far in 2014, compared with nine for all of 2013. While most sectors remain relatively clam, the utilities and chemicals sectors are seeing huge spikes in defaults.

 

 

Fitch Warns: Another Jump in US HY Default Rate Looms

A potential bankruptcy filing from another struggling giant, Caesars Entertainment Operating Co., would propel the trailing 12-month US high yield default rate to 3.4% from its June perch of 2.7%, according to Fitch Ratings. With its $12.9 billion in bonds in Fitch's default index, the gaming company's impact on the default rate is pronounced - similar to Energy Future Holdings' (EFH) April bankruptcy. Caesars also adds to notable trends of busted LBOs and the exclusive camp of serial defaulters.

 

There have been 10 LBO related bond defaults thus far in 2014, compared with nine for all of 2013. The failed LBOs affected $21.8 billion in bonds this year and 26% of all bond defaults since 2008. Caesars would bring the latter tally to 29%. In addition, a Caesars filing would follow two prior restructurings via distressed debt exchanges (DDEs). Since 2008, 24% of issuers engaged in DDEs have subsequently filed for bankruptcy.

 

June defaults included Affinion Group, Allen Systems Group, MIG LLC, and Altegrity Inc., bringing the year-to-date high yield default tally to 20 issuers of $23.7 billion in bonds versus an issuer count of 19 and dollar value of $8.4 billion in first-half 2013. July defaults have so far included Essar Steel Algoma and Windsor Petroleum Transport.

 

...

 

At midmonth, approximately $33 billion in high yield bonds were trading at 90% of par or less - a relatively modest 2.9% of the $1.1 trillion in bonds with price data.

*  *  *

Which explains why, as we noted poreviously, High Yield credit is flashing bright red...

 

As Barclays Phil Solarz warns,

One of the things that sticks in my mind from 2007 (and I am NOT suggesting a 2007/2008 repeat here) is the fact that the credit markets moved before equity markets....and not just once, but three or four times through 2007 and 2008.

 

I recall looking at charts like the attached and thinking "why has this correlation broken down?"

 

Inevitably, the credit markets would be right, and the equity market would eventually catch up and re-establish the correlation.

 

The chart above shows (the inverse of) the junk-less-10 year spread vs the S&P. The tight correlation of the past 12 months (and actually, the last 3 years) has broken down this month., as we noted previously,

Which in the past has led to equity weakness...

 

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Thu, 07/31/2014 - 13:09 | 5027917 PartysOver
PartysOver's picture

No problem.  Just perp walk the Fitch folks and then a Fed Bailout.  Wham bam problem solved.

Thu, 07/31/2014 - 13:13 | 5027933 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

The central planners are losing control of this economy. That thing called reality is showing it's ugly head.

Thu, 07/31/2014 - 13:27 | 5027990 power steering
power steering's picture

77,000,000 Americans undergoing collection efforts on high yield credit card debt

Thu, 07/31/2014 - 13:36 | 5028003 LawsofPhysics
LawsofPhysics's picture

...yes, owe the bank a few $1,000 and that's your problem...  ...collectively owe the bank a few trillion and it's their fucking problem. The vegas style junk bond bonanza is back...

Thu, 07/31/2014 - 16:07 | 5029045 TeethVillage88s
TeethVillage88s's picture

What Ever the Industry, the Fault is the Financing, the Terms, and the Amount of Financing.

Planned Coup. They want to Privatize Utilities.

This is Fascism. Crony Capitalism. Bank Coup in Washington DC.

"Bring Out your Dead, Bring Out Your Dead"

Thu, 07/31/2014 - 13:10 | 5027923 fauxhammer
fauxhammer's picture

Please remain clam...

Thu, 07/31/2014 - 13:31 | 5028017 power steering
power steering's picture

Thats the national motto of Liberia

Thu, 07/31/2014 - 14:16 | 5028280 S.M.T.U.Q.I.
S.M.T.U.Q.I.'s picture

This is no time to oyster...

Thu, 07/31/2014 - 13:13 | 5027932 youngman
youngman's picture

I hope someone fails..it seems in this new normal..noone fails anymore...

Thu, 07/31/2014 - 13:32 | 5028028 power steering
power steering's picture

Other than the midddle class

Thu, 07/31/2014 - 13:15 | 5027943 junction
junction's picture

Time for the 0.01%'s August monthly vacation.  No talk of LBOs allowed until after Labor Day.

Thu, 07/31/2014 - 13:14 | 5027944 LawsofPhysics
LawsofPhysics's picture

ZH has been all over this for quite some time.  ...and for that we thank you.

Thu, 07/31/2014 - 13:23 | 5027973 Loucleve
Loucleve's picture

No doubt higher interest rates will help this.

And someone at Fitch is in deep doo-doo.

Thu, 07/31/2014 - 13:26 | 5027980 yogibear
yogibear's picture

And they can default. They have been showered with money. Take it and default, what's the problem? Paying 4% interest for trash is a good deal for the debtors. Can't pay? No problem just default and walk away. Set up a new business and grab some more cash for trash.

People over the last few years forgot why they call them junk bonds.

 

Thu, 07/31/2014 - 13:30 | 5028014 LawsofPhysics
LawsofPhysics's picture

yes, we have been here before.  if this is anything like the last big turn and burn in the junk bond arena, get long "unmarked graves", beat the rush.

Thu, 07/31/2014 - 13:48 | 5028123 Duffy
Duffy's picture

Fortunately, the government and the banks learned to avoid the sort of systemic over-leveraging and exposure, as with credit default swaps, and they also began tightly regulating hedge fund performance metrics....So I think we're gonna be just fine, and moreover, on her death bed, Janet Yellen will receive... total consciousness.

 

So, she has that going for her.

Thu, 07/31/2014 - 14:15 | 5028277 Fuku Ben
Fuku Ben's picture

Was this an approved message or will they be fined into submission?

Thu, 07/31/2014 - 14:36 | 5028387 Spungo
Spungo's picture

I better ask my drug dealer if he's at risk of default.

Thu, 07/31/2014 - 19:26 | 5030044 Everybodys All ...
Everybodys All American's picture

A president who understands the role true free market capitalism should take in "America" can begin to at least fix this with a public that's ready to go in a different direction. What we have devolved into is not free market capitalism as many know. Call it what you will but it's not working. There are several steps that have to be taken including defaults. They are coming so what do we want to do in the way of reform?

1. Federal government has to be downsized dramatically. I'm talking dramatic. I'd close nearly every government department and agency if possible because this may be the only way the federal spending can be brought under control. Humanitarian needs (Social Security, Medicare) would be the only spending allowed and would be closely monitored for fraud.

2. Bankruptcy will once again have to be a major part of the reform. Bankruptcy is what makes capitalism function as the system clears out the dead wood and poorer run companies. When you screw up the consequences are that you lose everything and that dead wood is removed so that new companies and growth can occur elsewhere. No government bailouts no matter who or what company is failing.

3. It will take a sound dollar (no more printing), a much weaker Federal Reserve run by a Volcker type (that will include higher interest rates) which creates a more normal incentive for savers, and bankruptcy of banks and shareholders who made bad investments. If higher interest rates means the Federal Reserve is bankrupt so be it. It's where we are heading anyway without reform. I'd also require the to big to fail banks be down sized or split apart and I think the case could be made that they've become monopolies.  

4. More importantly tax breaks for job creation which includes incentives to keep jobs here in America.  Unemployment is the virus that has to be contained and solved because it weakens the entire system and creates long term dependency.

5. No more deficit spending or trade imbalances. If this country can't make it here then we need to find out what it takes to make it here. Trade imbalances create unemployment here in America and unemployment can not be tolerated long term.

If the concept of America finally were to die it will be because people choose the path toward tyranny and that is the road we are on today. Choosing free market capitalism will take much sacrifice but it will work and has worked before.

Is it too late? I don't think so but I'm the eternal optimist on this country

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