Fitch: Sector Concentrations Add Risk to US HY Default Outlook

NEW YORK--()--Top-heavy sector growth continues to add complexity and risk to the U.S. high yield default outlook, according to Fitch Ratings. The U.S. high yield default rate remains low, ending September at 2.5%. However, sensitivity to adverse events remains ever present. In addition to the economy, credit availability, and new transaction credit quality, the default outlook is also becoming increasingly tethered to the health of large industries.

The U.S. high yield market has advanced at an impressive pace since 2009, growing 54% to its current $1.3 trillion size. However, this expansion has been anything but even on a sector basis. Energy, healthcare/pharmaceuticals, and telecom have contributed 48% of the $462 billion in new post-crisis bonds, mostly through new issuance activity. When adding banking/finance and metals/mining to the mix, these five sectors represent 49% of market volume. Energy in particular has had a dramatic run, increasing 148% since 2009. At $211 billion, it stands at 16% of market volume. Furthermore, energy issues rated 'B-' or lower total $75 billion, a significant increase from $16 billion in 2009.

Monitoring the health of suddenly large, heavily debt-financed sectors is critically important. The 2001-2002 recession was precipitated by a meltdown in the telecom sector, which reached 20% of market volume in the booming late 1990s dot-com years via issuance of deep speculative-grade bonds. Rapid growth, facilitated by buoyant capital markets, ultimately led to overcapacity, a common driver of industry distress in the high yield space but this time on a large and more disruptive scale. Record high default rates in the sector combined with poor recovery rates wreaked havoc for the rest of the market.

For additional information, please see our report titled, "Fitch U.S. High Yield Default Insight, Reading the Market Diversity Tea Leaves," which is available on our website www.fitchratings.com.

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.

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Applicable Criteria and Related Research: Fitch U.S. High Yield Default Insight (Reading the Market Diversity Tea Leaves)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=757007

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Mariarosa Verde, +1-212-908-0791
Managing Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Eric Rosenthal, +1-212-908-0286
Senior Director
or
Kellie Geressy-Nilsen, +1-212-908-9123
Senior Director
Fitch Wire
or
Media Relations, New York
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Mariarosa Verde, +1-212-908-0791
Managing Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Eric Rosenthal, +1-212-908-0286
Senior Director
or
Kellie Geressy-Nilsen, +1-212-908-9123
Senior Director
Fitch Wire
or
Media Relations, New York
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com