Causes, Consequences and Implications for Reform
Edited by Lawrence E. Mitchell and Arthur E. Wilmarth, Jr
Chapter 8: Defaults and Returns in the High-Yield Bond Market: The Year 2008 in Review and Outlook
8. Defaults and returns in the highyield bond market: the year 2008 in review and outlook1 Edward I. Altman* and Brenda J. Karlin** The year 2008 proved to be a difficult one for investors in high yield, with more than $50 billion in defaults, the largest dollar amount in six years, and the continuing turmoil in credit markets. Returns versus 10-year Treasuries were at their lowest historical levels, new financings ground to a halt, spreads increased to record levels, and an unprecedented 82 per cent of high-yield bonds outstanding were classified as distressed by year-end. The default rate rose to 4.60 per cent; while only 67bp above average, this was the highest rate since 2003, and significantly larger than the 0.51 per cent default rate of 2007. The fourth-quarter 2008 default rate was 2.84 per cent, the highest quarterly default rate since the third quarter of 2002. Default losses on high-yield bonds came in at 2.83 per cent, based on a weighted average recovery rate of 42.5 per cent just after default, slightly below the historical average of 45.1 per cent. The average recovery rate was elevated by the record level of distressed exchanges in 2008. The weighted average recovery on bankruptcy and payment defaults was considerably lower at 27.1 per cent, compared to 52.2 per cent for distressed exchanges. These levels are significantly lower than a year ago, when the recovery rate was at its highest level since 1987. Returns on high-yield bonds reached historically low levels, ending the...
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