Fitch: High yield default rate forecast lowered to 1% for end-2021

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KUALA LUMPUR (June 11): Fitch Ratings reduced its year-end 2021 high yield default rate forecast to 1% from 2%, reflecting increased capital market confidence as constricted sectors in the economy re-open, which has led to robust issuance, and resulted in enhanced liquidity and pushed out maturities.

In a statement on its website June 10, Fitch senior director of leveraged finance Eric Rosenthal said the expected 1% year-end rate would be the lowest since 2013, and could challenge the 0.5% mark set in 2007, assuming the current strong environment continues.

"The Top Market Concern Bonds total has declined for seven straight months to its lowest level since January 2019,” he said.

Fitch said year-to-date default volume is down 88% compared with one year prior at just US$4.4 billion, or 0.3% year-to-date.

It said the May trailing 12-month default rate stood at 2.6% and is expected to fall to 2% by the end of June.

The trailing 12-month default rate is expected to dip as low as 1.3% by the end of July.

The rating agency said the energy default rate is expected to fall to 7.5% by the end of June, and to around 5% by July, and continue drifting lower to Fitch's eventual 2% year-end forecast.

Fitch expects several notable sector default rates to end the year at or below 1%, including healthcare/pharmaceutical, technology and retail.

Fitch's Top Market Concern Bond total declined to US$15.5 billion from US$19.7 billion last month and has fallen 70% from its May 2020 peak.

The 2.5%-3.5% default forecast for year-end 2022 remains unchanged, reflecting uncertainty around the sustainability of the demand recovery for some sectors.

The rate is far more likely to finish at the lower portion of the range.

Fitch said high yield issuance tallied US$235 billion through May, up 53% compared with the same period last year and nearly topping the full year 2019 pre-pandemic total.

It said every month in 2021 has produced at least US$40 billion of volume, which puts the full-year total well on the way to besting last year's record US$416 billion.