Energy and metals/mining defaults continued unabated midway through the fourth quarter, placing continued pressure on the U.S. high yield default rate, according to Fitch Ratings. Five energy companies either completed distressed debt exchanges (DDEs) or missed a payment in October while five defaults have been recorded so far this month.
The energy trailing 12-month (TTM) default rate finished October at 5.3%, the highest point since a 9.7% peak in 1999, while the exploration and production subgroup TTM rate hit 9.0%.
The metals/mining sector TTM rate stands at 9.5% while the coal subsector jumped to 27.0%. November defaults for coal producer Hidili Industry International and Essar Steel Algoma Inc. along with a potential filing for Arch Coal Inc. would propel the metals/mining TTM rate above 14% and the coal subsector to 40%.
The overall TTM default rate remains subdued and ended October at 2.9% with problems remaining largely contained to energy and metals/mining. The rate not including energy, metals/mining, and Caesars Entertainment Operating Co. is 0.7%.
A large majority of this year's metals/mining defaults have been bankruptcies; however, a significant portion of the energy defaults have involved DDEs. In total, 11 energy companies utilized DDEs since the start of April to improve their capital structure and buy time as liquidity and cash flows are pressured by oil prices languishing at nearly $45 per barrel.
In addition, new issuance has averaged just $13 billion since June, leading to a 13% decline in year-to-date volume to $214 billion versus last year. Energy and metals/mining experienced no new high yield bond issuance in October, the first time this happened since August 2011. Volume in these two sectors is down 39% versus one year prior while the rest of the market has fallen 5%. 'CCC' and non-rated activity has been light all year, producing just 10% of issuance.
Tighter bank lending terms could trigger additional high yield defaults. The October U.S. Federal Reserve Senior Loan Officer survey revealed that bank lending standards have tightened for large and middle market firms, reversing 14 quarters of easing. Additionally, the Shared National Credit review released Nov. 5 noted that leveraged transactions originated within the past year continued to exhibit weak structures, especially related to oil and gas exploration, production, and energy services.
The full report, "Energy Default Rate Heads to 6%; Arch Filing Would Push Metals/Mining Over 14%," is available at www.fitchratings.com.