Fitch: Low Default Rate, Growing Risk Receptivity (Covenant-Lite Loan Volume is Growing)

After seeing charts of loan delinquency and charge-off rate trends, here are Fitch's views on the credit market (emphasis mine).

"Fitch: Low Default Rate, Growing Risk Receptivity
29 May 2013 8:00 AM (EDT)

Fitch Ratings-New York-29 May 2013: The trailing 12-month U.S. high yield default rate remains modest - 1.8% through April - extending a three-year run at well below the long-term average annual rate of 4.6%, according to a new Fitch Ratings report.

Thirteen issuers defaulted on $5.9 billion in bonds in the first four months of the year, practically even with the 14 issuers and $5.8 billion recorded over the same period in 2012. The weighted average recovery rate on the defaults was 77.1% of par.

The surge in asset values this year provides a strong support for the low default rate environment. However, risk receptivity is also growing. The second-quarter edition of the Federal Reserve's 'Senior Loan Officer Survey' revealed the most accommodating conditions for borrowers in two years.

While debate rages on regarding the timing of the Fed's exit strategy, history cautions that the impact of easy money policy can linger and the default rate can remain low even as credit quality deteriorates.

Despite the Fed's best efforts to tame speculative behavior in the years leading up to the financial crisis, the accumulated impact of loose monetary policy in the aftermath of the 2001 -2002 downturn persisted, and transactions continued to come to market with aggressive terms and leverage levels. In 2007, for example, corporate profit growth was under significant strain but that year, 'CCC' rated issuance soared to, at the time, a record high. Given the heated funding environment, the default rate remained below 1% in 2006 and 2007. The low default rate perpetuated the cycle of aggressive transactions and was in the end a red flag of systemic risk rising rather than shrinking.

The growing volume of covenant-lite loans this year illustrates that post-credit crisis conservatism is waning. Corporate profit growth is decelerating while debt is rising.

For full details please see 'Fitch U.S. High Yield Default Insight - April 2013', which is available at '' or by clicking on the link below."


Here's the link to Fitch's Report: 'Fitch U.S. High Yield Default Insight — April 2013' (requires a login).

If interested, here's an interesting update on Spain's RMBS market (Fitch: Andalucia Property Decision Highlights Spain RMBS Concern). Spain's economy is deleveraging after its housing market crashed.

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