The third round of Fed quantitative easing is pumping up the issuance of CCC-rated debt, according to the latest report from Fitch Ratings. Of total bonds issued in September, 26% were junk-rated, a new monthly high for the year. The total value of all new issues was $38.6 billion.
The trailing 12-month default rate on high-yield bonds in September fell to 2% from 2.2% in August. The ratings firm expects the default rate to end the year below last month’s estimate of 2.5% to 3%. Based on last year’s default rate and “funding conditions so robust,” Fitch now thinks junk bond defaults will come in at around 2% for the full year.
The agency noted one Chapter 7 bankruptcy and one missed payment in August. So far this year the defaulter count is 25 and the value of defaulted bonds is $13.4 billion, up $1.2 billion since August. At the same time last year there had been 12 defaults valued at $7.9 billion.
But there are some problems. Says Fitch:
Booming issuance notwithstanding, fundamentals show that credit gains have slowed this year — not surprising given the economy’s sluggish performance — and the bottom tier of speculative-grade issues has expanded. The ‘CCC’ or lower pool has grown to $227.3 billion from $196.8 billion since the beginning of the year (including ‘B–’ issues, this high-risk slice of the market now totals $358.9 billion, up 9% from the start of the year). The Fed’s efforts to revive the economy and a positive resolution to the U.S. fiscal cliff remain critical even as the heightened demand for yield product is allowing more highly levered and vulnerable companies to access the debt markets.
The Fitch Ratings report is available here.