Energy defaults contributed to record 2001, agencies say

HOUSTON, Jan. 14 — Huge defaults by investment grade energy-related companies helped drive up unpaid debt to record levels in 2001, two credit ratings agencies said.

The year began with defaults by California’s Southern California Edison Co. and Pacific Gas & Electric Co. and ended with the default by Enron Corp., Houston. In dollar terms, S&P said those three issuers alone accounted for nearly 20% of all 2001’s defaults.

S&P reported total annual corporate defaults exceeded 200 for the first time last year, with 211 issuers failing to make payments on nearly $115.4 billion of debt through Dec. 31. The credit rating agency said the total dwarfed the previous record set in 2000, when 132 issuers defaulted on $42.3 billion in debt.

Fitch IBCA said blockbuster bankruptcies, a systemic meltdown of fledgling telecom issuers, and a marked deterioration in credit quality drove high-yield default volume to an unprecedented $78.2 billion in 2001, resulting in a new record default rate of 12.9% for the year.

Telecom and defaults by one-time investment grade “fallen angels,” including SoCal Edison, Pacific Gas & Electric, USG, Finova, Comdisco and Enron, hit an record-breaking $24 billion, comprising a “huge” two-thirds of the year’s default volume, Fitch said. Telecom and fallen angels had such a disproportionate impact on the year’s high-yield default statistics that excluding the two, Fitch calculated the default rate would have ended the year at 5.9% rather than 12.9%.

But for defaults by Enron, SoCal Edison, and Pacific Gas & Electric, overall the energy industry actually experienced a good year with a low default rate of 0.3%, Fitch said.

The fourth quarter produced dismal recovery rates on defaulted high-yield bonds, Fitch said. The weighted average recovery rate fell to 16à‚¢ on the dollar. In contrast to the first 9 months of the year, when fallen angel recovery rates averaged 80à‚¢ and boosted overall recovery statistics, Fitch said the deep erosion in the value of defaulted Enron bonds actually depressed recovery rates in the fourth quarter.

The record volume of defaults combined with low recovery rates meant investors suffered huge dollar losses on their investments. For traditional high yield issuers (excluding fallen angels), the weighted average recovery rate in 2001 was only 15à‚¢ on the dollar. Putting this in dollar terms, investors recovered only $7.6 billion upon default, on $51.3 billion of par value defaulted bonds, Fitch said.

Diane Vazza, head of S&P Global Fixed Income Research, said defaults typically peak 6 months after an economic bottom. “We would expect to see continued high default rates, with defaults peaking at the beginning of the summer, when speculative-grade default rates could reach 11%, and then trailing off at year end,” she said.

“In 2002, we expect defaults to be more broad-based than they were in 2001,” said Vazza, “although we’ll see some concentrated weakness in certain areas of consumer products and retail.”

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