High Times for High Yield

By Hal M. Bundrick

NEW YORK (MainStreet) These are high times for high-yield bonds, and the outlook for 2014 seems just as sunny. Below-average default rates have meant above-average returns for investors, and Fitch Ratings projects little change as credit availability and good corporate fundamentals continue to drive the market.

Fitch says the U.S. high yield default rate will remain in a range of 1.5% to 2.0% in 2014.

"Many of the recognized default candidates of the past several years have already restructured, and a stronger economy combined with favorable funding conditions is sure to give some strapped companies a new lifeline," Mariarosa Verde, managing director of Fitch Ratings says in a report.

The ratings firm also expects improved U.S. GDP growth of 2.6% in 2014, up from 1.7% this year.

"In this, the fifth year of an uneven and often unpredictable recovery from the financial crisis of 2008-2009, the more important metric will be new issuance credit quality and the extent to which a soaring stock market and low borrowing costs will fuel more aggressive, debt-accretive transactions," Verde says.

Fitch analysts believe the funding environment remains very favorable as new issues reflect "a fully revived loan market." Scheduled bond and loan maturities are quite low over the near term, with $117.6 billion maturing in 2014 and 2015 -- representing 5.4% of market volume and a just fraction of the bonds and loans sold in 2013.

"In 2013, defaults closely followed our expectations," Verde adds. "We projected a repeat of 2012 activity. Through late December, there have been 35 issuer defaults on $18.5 billion in bonds versus 32 issuers and $20.5 billion in 2012. The market grew 10% in size over the course of the year, which put some modest downward pressure on the default rate, but the issuer count and par value of defaults was nearly identical year over year."

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