Defaults, Bankrupt Bonds Bode Well

Junk bond default rates crept down slightly in November while returns on bankrupt bonds surged, both measures signaling bluer skies ahead for the high yield market.

The default rate shrank slightly to 5.7% of total high yield paper, or 7.1% in terms of dollar value, after hovering near 6% in September and October, according to Moody's Investors Service. The trailing 12-month defaulted bond price reached 56.47 cents on the dollar for senior secured notes, 38.60 on senior unsecured notes and a meager 33.58 on subordinated notes.

As defaults fell, a surge in November in Moody's Bankrupt Bond Index signaled yet another positive for high yield distressed. The index rose 12.6% to its highest level this year. Last month's gain - which reversed three consecutive months of losses - brings 1999's year-to-date returns to a net gain of 11.2%.

Still, the total amount of bankrupt debt more than doubled to a record $19.3 billion from November 1998.

Leading the recovery were telecom and energy sector issues. ICO Global Communications' 15% senior notes due August 2005 skyrocketed more than 122% in November, after rumors surfaced that telecom heavyweight Craig McCaw was investing up to $1 billion to save the troubled company. Other satellite telecom issuers also benefit from the news - Iridium's four outstanding issues traded up 8.3%, while International Wireless Communication Holdings' notes were up 9.7%.

In the energy sector, Eagle Geophysical led the recovery with a 25% gain on its guaranteed senior notes. Costilla Energy's senior notes shot up 20% while National Energy Group's notes advanced 6.7%.