Fitch: HY Volume Picks Up Pace in July, August as Energy Defaults Continue
Link to Fitch Ratings' Report: Fitch U.S. High Yield Default Insight (U.S. HY TTM Default Rate Exceeds 5%; Energy YTD Defaults Tally $33 Billion)
The high yield (HY) market generated $15.2 billion of new issuance in July, more than double the volume during the same month last year, according to Fitch Ratings. August issuance also remains well above last year's pace, providing a boost to the HY market, which is otherwise down 27% year-over-year.
"After a tough first-half for issuance, HY market volume has exceeded last year's total since the start of June," said Eric Rosenthal, Senior Director of Leveraged Finance. "While lackluster energy volume is still a hindrance, the final five months of 2015 averaged just $14 billion of issuance, so the market could potentially reach last year's $251 billion total."
HY energy companies issued just $12 billion year-to-date, compared with $32 billion during the same time frame in 2015. Similarly, year-to-date issuance for banking/finance companies is at $9 billion versus $27 billion in 2015, while healthcare/pharmaceuticals tallied just $10 billion year-to-date versus $24 billion in 2015.
The rise in oil prices since the February trough has also boosted energy issue trading prices in the secondary market, with $83 billion of HY bond outstandings now bid below 70, down from $280 billion. Energy still remains a large portion of that deep discount universe - now $44 billion - but significantly less than the $142 billion registered in February.
Despite those improvements, energy defaults continue. Halcon Resources made its long-awaited bankruptcy filing in July while missed payments from Bonanza Creek Energy and Light Tower Rentals are on deck for August. Energy sector names comprise nearly half of Fitch Ratings' bonds of concern list, and at least a few of them are likely default candidates by year-end.
The trailing 12-month (TTM) default rate rose to 5.1% at end-July from 4.9% at end-June. With a 16% July TTM rate, the energy sector default rate could rise as high as 20% this year before settling at 16-18% by year-end. Energy now comprises 17%, or $258 billion, of the total U.S. HY market universe.
The upcoming energy maturity schedule is modest mitigating pressure on the sector. Energy accounts for $17 billion of total HY maturities ($78 billion) through December 2017. Less than half of that amount is attributed to energy names rated 'B-' or lower.
The full report, "U.S. High Yield Default Insight: U.S. HY TTM Default Rate Exceeds 5%; Energy YTD Defaults Tally $33 Billion," is available at www.fitchratings.com
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