FIN-02-050 |
NYU Stern School of Business |
Defaults and Returns on High Yield Bonds:
Analysis Through September 30, 2002
May 2002
Edward I. Altman and Gaurav Bana
ABSTRACT
The third-quarter 2002 default rate for high yield bonds was 4.95%, based on
$37.48 billion of defaults. The quarterly default rate is the highest in history, surpassing
the first quarter of 1991 rate of 4.80%. One massive default, WorldCom, accounted for
$28.30 billion of defaults (76%). Without WorldCom, the third quarter default rate would
have only been 1.2%.
The dollar weighted default rate for the first three quarters has already broken the
record for a single calendar year reaching 10.98%. And, the latest four-quarters’ default
rate of 15.01% has also set a record. Again, WorldCom’s huge default contributed about
4% of this record total. The persistently high default rate through the third quarter has
resulted in a near record yield spread of 10.10% -- second only to 1990’s 10.50%. The
current yield spread is more than 5% above the historical average. We believe the default
rate has peaked in Q3-2002 and depending on the size of the decline, we believe the huge
yield spread could reflect an over-sold market.
Counting WorldCom ($46.0 billion in liabilities), there were more than $197 billion
in liabilities of firms which filed for Chapter 11 protection through the third quarter and
26 firms had liabilities greater than $1 billion. The count was 22 firms through the first-half
of the year, so the third-quarter number was "only" four, including WorldCom.
There were 39 of such firms in 2001 - - a record year.
Edward I. Altman
Institution: Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012
Telephone: (212) 998-0709
Email: ealtman@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~ealtman
Gaurav Bana
Institution: Research Associate at the NYU Salomon Center
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