CHICAGO--(BUSINESS WIRE)--Modest economic growth, improving corporate profiles, strong retail inflows and a downward trending default rate each contributed, in part, to the high yield bond and loan markets' successful fourth quarter and full year, according to Fitch Ratings' 'U.S. Leveraged Finance Quarterly'. While momentum from the second half of 2010 may extend into 2011, Fitch believes it will be difficult for the market to equal 2010's record high yield volume.
Corporate credit quality showed continual improvement throughout 2010 as modest economic growth helped improve issuers' operating profiles and bolster liquidity. In the fourth quarter, upgrades equaled downgrades. Fitch expects upgrades to continue to outpace downgrades throughout 2011.
The pace of U.S. defaults continued their downward trend through the fourth quarter of 2010. Fitch's U.S. high yield default rate ended 2010 at 1.3%, down from 13.7% at the end of 2009. Fitch believes the U.S. high yield default rate will remain low in 2011 (See Fitch commentary dated Jan. 18, 2011).
The high yield bond market enjoyed a record-setting fourth quarter and year. Issuance in the fourth quarter totaled $80.3 billion exceeding the previous quarter's record of $69.6 billion. For the second consecutive year, high yield issuance set a record with $252.4 billion of new issuance compared to 2009's total of $151.5 billion. Refinancing continued to dominate high-yield bonds' use of proceeds as issuers focus on extending maturities. Bond-for-loan takeouts represented 22% of total issuance in 2010. While issuance is unlikely to break 2010's record total, Fitch expects high yield issuance to remain very strong in 2011.
The U.S. leveraged loan market finished 2010 on a strong note. Leveraged loan issuance increased 37% from the same period in 2009 and 36% from the prior quarter. For the year, leveraged loan issuance increased 57% versus 2009 to $376 billion. Overall, loan issuance volumes were supported by strong yields, growing investor demand, and issuers' near-term refinancing needs. During the fourth quarter, LBO, dividend recap and second-lien transactions began to once again emerge, testing investors' tolerance for risk. Fitch expects loan issuance will likely exceed 2010's levels, with refinancing volume driving a majority of 2011 issuance.
Primary U.S. CLO issuance more than doubled in the final quarter of 2010 in terms of the number and volume of transactions that closed. Secondary CLO performance continued to benefit from positive trends in the U.S. loan market. With defaults running well below the historical average and recoveries rebounding from the lows observed in 2009. Fitch expects to see moderate growth in CLO issuance in 2011.
The report also highlights the Competitive Power Generation sector. The many struggles the sector faced in 2010 and why these challenges are likely to continue into 2011.
The full report is available on the Fitch website at 'www.fitchratings.com/usleveragedfinance'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: U.S. Leveraged Market Quarterly: Fourth-Quarter 2010
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=596625
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