Fitch: US HY Default Rate Forecast at 3%; Energy to 3% in 2017

NEW YORK--(BUSINESS WIRE)--Link to Fitch Ratings' Report: Fitch U.S. High Yield Default Insight (U.S. HY Default Rate Roughly 3%; iHeart Largest U.S. Bonds of Concern Name) https://www.fitchratings.com/site/re/891677

After driving the 2016 rate, US energy defaults will taper off next year, with a forecast of just 3% compared with the current 18.8% November trailing 12-month rate (TTM), according to Fitch Ratings. We expect the US high-yield default rate to finish 2017 at roughly 3%. US energy default volume totals $39 billion so far this year, nearly tripling the $14.9 billion registered in 2015. Energy defaults peaked in the second quarter then slowed amid crude oil price recovery.

Fitch forecasts nearly $36 billion of US defaults in 2017, well below the $59 billion posted year to date. There isn't a specific sector expected to propel the rate, such as energy and metals/mining in 2016, but there are areas with troubled issuers at risk.

Fitch expects the US retail sector to have its default rate climb to roughly 9% from the current 1% TTM level. Increased online competition, more discounters and consumer spending shifted to travel and entertainment have challenged mall-based apparel retailers and is expected to propel certain retailers into default. However, increased defaults will not materially boost the US rate as a result of the small 4% weighting of the retail sector within the US Fitch Default Index.

Healthcare/pharmaceuticals and utilities/power/gas both had their first 2016 defaults in December when 21st Century Oncology elected not to make its interest payment and Illinois Power Generating Co. filed for bankruptcy, respectively. Fitch expects those two sectors to produce roughly $5 billion of defaults combined next year.

iHeart Communications, Inc. represents the largest US name on Fitch's Bonds of Concern list. With nearly $10 billion of bonds outstanding, the radio broadcaster is expected to pay the $192.9 million of the 5.5% senior notes due today held by public holders, although it will likely forbear the $57 million that iHeart holds in the Clear Channel Holdings subsidiary. The large size of the debt would swing the default rate by 0.7% should a default occur.

Excluding energy and metals/mining and a potential filing for iHeart, the 2017 US default rate is a benign 2%, in line with the par-weighted non-recessionary average.

The current TTM US default rate is 4.7%, up from 4.6% at the end of November. In December, there has already been $3.4 billion of defaults recorded, more than the past two months combined.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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