Citigroup Tops Junk Defaults; Merrill Deals Most Apt to Fail

Citigroup Global Markets led the most high-yield deals since 2000 that subsequently defaulted, according to BondWeek's fifth annual Turkey Tables. When the defaults are viewed as a percentage of total principal and as a percentage of total issues, however, Merrill Lynch is at the top (or bottom) of the heap: just over 17.5% of the total principal of all of the high-yield deals led by Merrill since 2000 ended up defaulting while just under 14.5% of all of its deals ending up in default (see charts below). The tables were calculated with data provided by Moody's Investors Service andThomson Financial.

Although this year's improving credit environment has improved the overall numbers, many firms have not been able to shake the telecom defaults that plagued them in past tables. While, this year's tables do not include the many deals that came in 1999 that ended up defaulting, Citigroup and Merrill's rankings still reflect high-profile defaults from issuers in the telecommunications industry. Citigroup led high-yield flops for Adelphia Communications and Rhythms NetConnections, while Merrill was also tinged by its participation in Rhythms offering and the 2001 sale for Global Crossing Holdings Ltd. "They're still flushing the toilet on that part of the market," says Martin Smith, portfolio manager at Penn Capital Management, which has about $300 million in high yield, referring to telecom deals. "You would expect Citi to finish there, because of the sheer volume of their deals," notes Brendan White, head of $1.1 billion in high-yield assets at Fort Washington Investment Advisors.

Defaults Down

Still, overall defaults are down. In last year's tables, which compared issues that came to market from Jan. 1, 1999 to November 2002, more than 30% of the principal Merrill brought to market ended up defaulting. For a full listing of each firm's high-yield defaults go to www.bondweek.com.

David Hamilton, director of corporate bond research at Moody's, notes that while credit fundamentals are improving, default rates would have been higher had the high-yield bond market not been so strong and willing to let issuers refinance existing deals. "About 75% of the new issue volume is from refinancings; this is bringing the default rate down quicker than fundamentals would have indicated," he says.

Investors say that while they evaluate credits on an individual basis, they also take into account which investment bank is distributing the securities. "We're certainly aware of the strength of the banker and what they've done," Penn Capital's Smith says.

"It's certainly a factor that makes us lean one way or the other if we're on the fence already," adds Bruce Walbridge, head of the roughly $700 million high-yield group at State Street global Advisors. He points out that although it leads the way, Citigroup has been hurt most by telecom. "They were a telecom shop, but if you strip out telecom, I think their numbers would be much better," he adds.