Aug 20 - Fitch Ratings has identified 31 U.S. issuers that have previously defaulted on debt and are at risk for a future default based on their low speculative-grade ratings in a report published today. Fitch used an Issuer Default Rating (IDR) of ‘B-’ or lower to screen historical defaulters for potential repeat offenders.
Within Fitch’s U.S. High Yield Default Index there are 50 issuers that have already defaulted twice or more since 2000, with two issuers defaulting three times. Distressed debt exchanges (DDEs) were the most common source of the first defaults, and bankruptcies were most frequently the cause of subsequent defaults.
The average time between these ‘round trip’ defaults was about 34 months, but this average declined to 14 months in the 24 instances that a DDE was the source of the initial default.
Companies with more than one default within a several-year period provide useful examples of the primary reasons why initial attempts at successful reorganization fail. Key drivers of second defaults are failure to resolve operating cost issues or sufficiently reduce debt. Second defaults are also frequent for issuers in industries that are in a deep cyclical trough or chronic decline. Chapter 22 is the informal name for a second Chapter 11 bankruptcy filing.
Fitch notes that compared to Chapter 7 liquidation, a second bankruptcy or another DDE may provide issues with the chance to preserve greater value for creditors, employees and other constituencies through the restructuring process. Debtors and creditors will pursue the default option that maximizes value based on their opinion of future cash flow and business prospects.
The full report ‘Chapter 22 Bankruptcies and Other Repeat Defaults’ is available at ‘www.fitchratings.com’.