Junk Bond Issuance Collapses, ‘Distress Ratio’ Spikes

Fitch Ratings is fretting about junk-bond defaults. ‘After five issuer defaults already this month accounting for nearly $2 billion in new volume,’ Fitch now expects that the default rate will hit 3.5% by year-end, up from 2.5% to 3% a few days ago. Through September, the trailing 12-month default rate was already 2.9%.
Worse: a 4% default rate by year end is ‘more likely’ than a 3% default rate. And it’s ‘set to rise further in 2016.’
In non-recessionary periods, the default rate averages 2%. During recessionary periods it averages 11%. That’s why recessions are terrifying for junk-bond holders. Junk bonds are called ‘junk’ for a reason.
We’re not there yet. But the energy and metals & mining sectors are getting there: in September, their default rates were 5% and 10% respectively. Fitch: ‘These sectors experienced three consecutive months with over $4 billion in defaults, a level not seen since 2009 when monthly volume in the entire market exceeded $4 billion for seven straight months.’
There is a period before default when investors are picking up on the troubles the company is having and demand higher yields in return for taking on the risks. Debt is considered ‘distressed,’ when the spread between its yield and the yield of US Treasuries surpasses 10 percentage points.

This post was published at Wolf Street by Wolf Richter ‘ October 12, 2015.