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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26838
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| Title: | Defaults & Returns on High Yield Bonds: Analysis through 1999 and
Default Outlook for 2000-2002 |
| Authors: | Altman, Edward I.
Hukkawala, Naeem
Kishore, Vellore |
| Issue Date: | Jan-2000 |
| Series/Report no.: | FIN-99-005 |
| Abstract: | Full year 1999 was again a mixed performance year for the high yield
bond market in the United States but for different reasons than the
mixed 1998 performance. Once again, total returns were lackluster,
registering just +1.73%. But, unlike last year’s companion
negative return spread vs. U.S. ten-year Treasuries, the return spread
in 1999 was a positive 10.1%, as yield spreads increased significantly
and Treasuries tumbled. And again, new issuance of high yield bonds was
impressive, topping $100 billion for the third consecutive year, but
aggregate defaults increased dramatically to an all-time record level of
over $23 billion (face value). The default rate registered a sizeable
increase, topping 4% (4.15%) for the first time since 1991 and
significantly above the 1.6% level of one year earlier. Combined with a
relatively low recovery rate of below 30 cents on the dollar, the
default loss rate was 3.2% in 1999, compared to a historical arithmetic
annual average of 1.9%. Despite 1999’s low absolute return, net
returns (after deducting losses from defaults, rating migrations and
interest rate changes) for the 1978-1999 period continued to show an
attractive compounded return spread over U.S. Treasury bonds of close to
3.0% per year (2.96%). This report documents the high yield bond
market’s risk and return performance by presenting traditional and
mortality default rate statistics and providing a matrix of performance
statistics over the relevant periods of the market’s evolution.
Our analysis covers the 1971-1999 period for defaults and the 1978-1999
period for returns. In addition, we present our annual forecast of
expected defaults for the next three years (2000-2002). Our 1999
forecast was for substantially higher defaults than 1998, but we
underestimated the record default levels. Default levels and rates were
swelled in 1999 due to a number of factors, including the huge new
issuance in the 1997-1999 period, a trend toward earlier defaults,
deteriorating credit quality of new issues, pockets of industry
fragility, and the continued vestige of 1998’s flight to quality.
For 2000, we expect default levels to decline to about $17.5 billion and
the default rate to regress to around three percent of the amount outstanding. |
| URI: | http://hdl.handle.net/2451/26838 |
| Appears in Collections: | Finance Working Papers
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