Fitch expects stable European default rates despite turbulence

Pittsburgh, May 27 -Default rates on European high-yield bonds should remain around the 2003 level of 6.4% for the next two years despite recent market volatility, according a report from Fitch Ratings released Thursday.

The rating agency says the news on 2004 rates continues to be positive, with only one European default recorded in Fitch's index by the end of April, for an annualized default rate of just 1.8%. Fitch said this positive outlook for default rates is supported by the improvement of the rating mix in the European high-yield market.

From June 2001, when more than 75% of the universe by volume was rated B- or lower, the rating mix in March reveals 46.2% in the BB range and only 12.6% in the C to CCC range, according to the report, called "FAQs: European High Yield Fundamentals v. Technicals: Which Way Now for Default Rates?"

Despite the positive trend, the agency cautioned about the trend toward more aggressive structuring that has seen total leverage ratios increase and a weak rating mix for the €4.9 billion of new issuance in April, when 79% of deals were rated B or lower. Fitch warns that this could result in increased default rates in 2006 and beyond.

According to the report, the May sell-off has been driven by the threat of rising U.S. interest rates, the evolving high-yield investor base, rising oil prices, geopolitical tensions and the scale of the recent deal pipeline relative to the size of the market. The report also highlights the impact of the high yield sell-off on transactions in the cable sector, both in the primary and secondary markets. Fitch says technical issues such as over-supply have affected individual deals.

The report says default rates have been improving since the market's nadir in 2002, to 6.4% last year from a record 25.1% in 2002. Weighted average rates also improved to 24% last year from 11% in 2001 and 15% in 2002.

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