High Yield Debt Default Rate Is At Lowest Level Since October 2019

The default rate for below investment grade debt has declined to its lowest level since October 2019. The fact that the default rate for this type of debt, also known as high yield or junk bonds, is declining significantly is signaling an improvement in the credit quality of corporations, that are typically very indebted. This decrease in the default rate will likely encourage a a greater diversity of investors, including those that tend to have less risk appetite, to buy this debt, especially in this very low interest rate environment. 

According to Eric Rosenthal, Senior Director of Leveraged Finance at Fitch Ratings, the trailing 12-month default “is projected to end the month of May at 2.7%.” This is a very positive development considering that in July 2020, the default rate for high yield debt was almost 6%. In fact, Rosenthal stated that “there is a strong possibility the rate finishes in the 1%-2% range by year end. It could even approach the 1% mark reached in 2013 if market conditions and macro fundamentals remain supportive.”

Fitch’s ‘U.S. High Yield Default Insight Report’ released today, highlights that enhanced liquidity and low, near-term maturities thanks to favorable capital market access and government stimulus’ have led to the reduction in the default rate forecast. The year-to-date default volume is about $4.1 billion, a significant 85% decline in comparison to the same period last year versus one year prior. “This equates to a miniscule 0.3% year-to-date default rate, marking the lowest level since 2011,” said Rosenthal.

The energy sector accounts for over 70% of the default volume of high yield debt. At the end of April, the energy default rate was 11.4%, about five times higher for the average of all sectors. However, Fitch does expect the energy default rate to decline to 10.5% by the end of May and likely under 8% by the end of June. For the longer-term, Fitch is forecasting a 3% energy sector high yield default rate by the end of 2021.

In another positive sign for the economy, Fitch’s Top Market Concern Bond total declined 1% to 19.7 billion (15 issuers) from April. This is the lowest since July 2019 and declined 62 from the May 2020 peak ($52.4 billion with 51 issuers).