NEW YORK--(BUSINESS WIRE)--Emerging market (EM) issuer defaults could contribute more meaningfully to U.S. high yield default trends if EM growth sputters as a consequence of the Federal Reserve's plan to scale back monetary stimulus, Fitch Ratings says.
Default activity in July was notable in that it included dollar-denominated high yield bond defaults from two Mexican companies - Desarrolladora Homex (homebuilding) and Maxcom Telecomunicaciones. These joined defaults earlier in the year from another Mexican construction company, Urbi Desarrollos Urbanos, and telecommunication peer Axtel SAB.
While defaults remain low overall, the EM related default tally of $2.8 billion through July is already the highest since 2009. The year-to-date default rate for this group is 2.5% versus 0.8% for the rest of the market.
EM dollar denominated issues total $116.5 billion, or close to 10% of U.S. high yield market volume. The EM total is up from just $65 billion at the end of 2010 with $43.3 billion issued since January 2012.
The $116.5 billion includes some large issuers that are in distress, including Brazilian oil company OGX (Issuer Default Rating CCC, Negative Outlook, $3.6 billion in bonds).
The largest country concentration in this group is Brazil ($30 billion), followed by Mexico ($16.3 billion) and China ($14.4 billion). The industry makeup of these issues befits their EM source with infrastructure-related and financial bonds representing most outstanding volume. The top sectors include energy ($27.7 billion), banking and finance ($18.0 billion), telecommunication ($11.2 billion), real estate ($11.1 billion) and building and materials ($8.5 billion). The cyclical nature of the industry mix adds to their vulnerability if growth stalls.
The par weighted average recovery rate on the EM issues has been 36.9% of par to date. With the exception of one bond, the affected issues were all unsecured. Of the $116.5 billion in EM bonds currently outstanding, an estimated $95.2 billion is unsecured.
The trailing 12-month U.S. high yield default rate rose to 1.9% in July from 1.7% in June. Four issuers defaulted on $3.0 billion in bonds, bringing the year-to-date volume tally to $11.4 billion and the defaulted issuer count to 23 - versus $10.2 billion and 20 issuers in the first seven months of 2012.
For full details please see 'Fitch U.S. High Yield Default Insight - Sensitivity to Emerging Market Trends' which is available at 'www.fitchratings.com' or by clicking on the link above.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.