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| Title: | Defaults and Returns in the High Yield Bond Market: The Year 2003 in
Review and Market Outlook |
| Authors: | Altman, Edward I.
Fanjul, Gonzalo |
| Issue Date: | Feb-2004 |
| Series/Report no.: | S-CDM-04-01 |
| Abstract: | High yield bond defaults in 2003 declined significantly from record 2002
levels closing the year at $38.5 billion for a default rate of 4.66%.
The fourth quarter’s rate of 0.36% was the lowest quarterly rate
since the fourth quarter of 1997. The default loss rate for 2003 also
declined to just 2.76% based on a weighted average recovery rate of
about 45% -- a major improvement from the 25% levels of the prior
several years. Fourteen of the 86 defaulting companies had issues that
were investment grade sometime prior to default. These fallen angels
accounted for 33% of defaulting issues and 46.3% of the defaulted volume
in 2003. The high-yield bond market returned an impressive 30.62% for
the year, the third highest one-year return since 1978 (when we first
began tracking returns). The return spread over ten-year US Treasuries
was a record high 29.4%, bringing the historic average annual return
spread to 2.22% per year. The concurrent yield spread at year-end fell
to 3.74%, the lowest year-end figure since 1997 and 4.82% less than one
year ago. New issues in 2003 recorded a near record level of $137.4
billion; the vast majority was used for refinancing existing loan and
bond issues. Based on our mortality rate methodology and assuming
different measures of credit risk of recent new issuance, we expect
default rates to continue their decline in 2004 to between 3.2% - 3.8%,
with rates increasing in 2005 to above 4.0%. |
| URI: | http://hdl.handle.net/2451/26739 |
| Appears in Collections: | Credit & Debt Markets
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