Bad Debt: More, But Less Bad

According to Fitch the amount of leveraged, high risk and high yield debt have now rose back to early 2008 levels, but the rating agency points out that number of downgrades on these assets are leveling out. In other words; the amount of bad debt is again as high as before the financial crisis, but it has become a little less bad. I’m not sure if this is good news, or bad news.

“As corporate defaults rates and volume increased, debtor-in-possession (DIP) volume spiked to approximately $14.6 billion in 2009, exceeding the previous high of $11.8 billion in 2005.”

Fitch Ratings


The high yield and leveraged loan markets both registered record total returns in 2009, although the pace of the rebound from a disastrous 2008 slowed in the fourth quarter. The high yield market remained the market of choice for refinancing maturing leveraged loans during the quarter, boosting new issuance for the year to record levels, Fitch Ratings write in a new report.

In addition, leveraged loan holders continued to restructure maturing loans through “amend and extend” agreements rather than forcing borrowers into default.

Fitch estimates that “amend and extend” volume increased to $22.1 billion during the fourth quarter, from $14.9 billion during the third quarter, and totaled over $60 billion for the full year.

“As a result, the rise in the high yield default rate continued to moderate throughout the year, with the trailing 12-month rate of the Fitch U.S. High Yield Default Index peaking at 16.4% at Nov. 30, 2009 and actually declining to 13.7% at year-end,” the rating agency points out.

Still, the number of downgrades in 2009 is a record high.

During the fourth quarter of 2009, speculative grade IDR downgrades totaled 13 compared to 8 upgrades, resulting in an upgrades-to-downgrades ratio of 0.62. The ratio has now improved for the past three consecutive quarters, largely the result of the sharp decline in downgrades since the first quarter of 2009. The absolute number of upgrades remained low.

During the fourth quarter, speculative grade IDR downgrades exceeded upgrades for the eighth consecutive quarter.

Fourth-quarter speculative grade IDR downgrades remained concentrated in the banking and financial services sectors for the second consecutive quarter, as this sector remained under pressure from increasing amounts of nonperforming assets.

Speculative IDR upgrades were concentrated in the auto supplier sector during the fourth quarter, as companies in this industry managed to significantly reduce costs and maintain liquidity despite the severe drop in auto sales during 2009.

I guess what Fitch is trying to say is that the bad loans seems to become less bad.

Trading At Old Hights

High yield secondary market trading volume remained active during the fourth quarter at $343.6 billion, up 13.6% from $302.5 billion during the third quarter and nearly equaling second-quarter volume of $343.9 billion.

Year-over-year, secondary trading volume increased 39.9% during the fourth quarter from $245.6 billion during the fourth quarter of 2008.

For the full year 2009, secondary trading volume increased 26.6% to $1,266.8 billion from $1,000.6 billion in 2008.

Get leveraged up!

Syndicated loan issuance totaled $174.3 billion in the fourth quarter of 2009, up 78.4% from $97.7 billion in the third quarter. For the full year 2009, syndicated loan issuance was $547.1 billion, down 28.3% from $763.0 billion in 2008.

Leveraged loan issuance totaled $84.6 billion in the fourth quarter, up 68.5% from $50.2 billion in the third quarter. For the full year 2009, leveraged loan issuance was $239.2 billion, down 18.8% from $294.5 billion in 2008.

Leveraged loans represented approximately 49% of total syndicated loan issuance during the fourth quarter, unchanged from the third quarter.

Oops!

As corporate defaults rates and volume increased, debtor-in-possession (DIP) volume spiked to approximately $14.6 billion in 2009, exceeding the previous high of $11.8 billion in 2005.

Due to the increase in the number of “amend and extend” transactions, debt exchanges, and a slowly improving U.S. economy, DIP loan volumes trended lower during the second half of 2009, to just $1.3 billion from $13.3 billion during the first half.

I guess this graph speak for itself:

Will everybody who is a “DIP” please raise their hands?

Here’s the full report: U.S. Leveraged Finance Quarterly Review

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