Bond investors face a range of risks. One variable that can result in a declining market value of a fixed-rate bond investment is increasing interest rates. As rates rise, the prices of fixed coupon bonds fall. Another key risk for bond investors is the probability of default by the issuer and the amount of recovery received following a default.
One entity that provides credit ratings to many bond investments and tracks the credit performance of those bond investments is the rating agency Standard and Poor’s. Through the end of October, defaults by those global bond issuers followed by this rating agency were reported to total 65.
Of the 65 corporate bond defaults reported thus far in 2013, 36 of the issuers were in the U.S. Twelve of the issuers were in Europe and 14 in emerging markets; the remaining three defaulting bond issuers were in other developed markets.
Twenty-eight of the 65 corporate bond defaults reported so far this year came as a result of missed interest or principal payments. Seventeen of the total defaults resulted from bankruptcy filings.
Some of the more recent defaults by U.S. corporate credits included GateHouse Media Operating Inc., FriendFinder Networks Inc. and Furniture Brands International Inc., as reported by the rating agency.
Through the same period in 2012, 68 bond defaults had been reported. Thirty-seven of the 68 were noted as being U.S. bond issuers. The next most significant group of defaulting entities were located in the emerging markets and totaled 19 issuers.
A longer-term, annual default average is reported to be approximately 4.5 percent, over the period 1985-2012. The 12-month annualized default rate for bond issuers, through June 2014, is projected to total 3.1 percent. This represents a slight increase from the annualized default experience during the recent 12-month period ending in September. Although a small increase in corporate bond defaults is forecast, the overall default experience remains relatively modest.
Defaults by bond issuers can provide some useful insight into the overall health of corporate entities, the availability of financing and other aspects about issuers' ability to obtain debt financing. Given the default experience so far in 2013 and the forecast for the first half of 2014, it appears the general corporate environment remains relatively stable and doesn’t appear to be trending materially worse.
Kirby Brown is the CEO of Beneficial Financial Group, based in Salt Lake City.