Defaults and Returns on High Yield Bonds: Analysis Through September 30, 2002

52 Pages Posted: 5 Nov 2008

See all articles by Edward I. Altman

Edward I. Altman

New York University (NYU) - Salomon Center; New York University (NYU) - Department of Finance

Gaurav Bana

affiliation not provided to SSRN

Date Written: October 2002

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.

Suggested Citation

Altman, Edward I. and Bana, Gaurav, Defaults and Returns on High Yield Bonds: Analysis Through September 30, 2002 (October 2002). NYU Working Paper No. S-CDM-02-10, Available at SSRN: https://ssrn.com/abstract=1295811

Edward I. Altman (Contact Author)

New York University (NYU) - Salomon Center ( email )

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New York University (NYU) - Department of Finance ( email )

Stern School of Business
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Gaurav Bana

affiliation not provided to SSRN ( email )

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