To date the defaults we’ve seen in the US high yield market have largely occurred in the energy/commodity sectors. To see whether this trend is likely to persist I spent some time comparing the current default cycle with that of the US telco sector in the early 2000’s (see also James’ recent blog for the parallels between today’s high yield market and that of 2001).
The telco bust occurred slightly later and was around ten times larger than the better-remembered dotcom bust. Following the industry liberalisation in the 1990’s firms in the sector built up about $1tn of debt. This debt was used to finance the construction of huge networks which, as it turned out, there was not enough demand for. Defaults began to pick up in early 2001 and peaked around twelve months later with more than 35% of high yield telcos defaulting as seen in the chart below.
The default cycle in the US energy sector began around a year ago and as at the end of March the proportion of US high yield energy firms in default stood at 15.2%, according to Bank of America Merrill Lynch. There have been 52 defaults over the past year in the US high yield market, of which 26 have been in the energy sector. This represents a much larger proportion of total HY defaults (50%) than did the telco sector at its peak in 2002 (below 30%)....MORE