U.S. High-Yield Default Rate Set for 3% in 2017

The U.S. high-yield default rate is expected to finish 2017 at 3%, according to a new report from Fitch Ratings. U.S. energy defaults, after driving the rate in 2016 and currently at an 18.8% November trailing 12-month rate (TTM), also are predicted to reach 3% next year. Default volume for U.S. energy totals $39 billion so far this year.

U.S. defaults in 2017 will reach $36 billion, Fitch expects, an improvement compared to the $59 billion year-to-date, with no specific sector forecasted to propel the rate, as energy and metals/mining did this year.

The U.S. retail sector default rate is expected to climb to 9% from its current 1% TTM. Challenges driving some retailers into default include online competition, an increase in discounters, and a shift in consumer spending toward travel and entertainment. The retail sector carries a 4% weighting in the U.S. Fitch Default Index, so an increase in defaults would not significantly raise the U.S. rate.

Fitch expects health care/pharmaceuticals and utilities/power/gas combined to reach $5 billion in defaults next year. The two sectors experienced their first defaults of 2106 in December when 21st Century Oncology did not make its interest payment and Illinois Power Generating Co. filed for bankruptcy.

Radio broadcaster iHeart Communications, with almost $10 billion in bonds outstanding, represents the largest U.S. name on Fitch’s Bonds of Concern list. If a default should occur, the size of the debt would shift the default rate by .7%.

A total of $3.4 billion in defaults has already been recorded for December, more than the past two months combined. The current TTM U.S. default rate is 4.7%, up from 4.6% in November, Fitch said.

– Adam Fusco, editorial associate

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