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Altman, Edward I.; Karlin, Brenda J. --- "Defaults and Returns in the High-Yield Bond Market: The Year 2008 in Review and Outlook" [2010] ELECD 697; in Mitchell, E. Lawrence; Wilmarth, Jr, E. Arthur (eds), "The Panic of 2008" (Edward Elgar Publishing, 2010)

Book Title: The Panic of 2008

Editor(s): Mitchell, E. Lawrence; Wilmarth, Jr, E. Arthur

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781849802611

Section: Chapter 8

Section Title: Defaults and Returns in the High-Yield Bond Market: The Year 2008 in Review and Outlook

Author(s): Altman, Edward I.; Karlin, Brenda J.

Number of pages: 41

Extract:

8. Defaults and returns in the high-
yield 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 con-
siderably 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 ...