Fitch: Enterprise Value and Capital Structures Key to Assigning RRs for High Yield Issuers

Fitch Ratings today published the third edition of its recovery-focused Leveraged Finance report, tracing the path to debt recovery estimates by focusing on key input drivers and their evolution for Fitch-rated U.S. corporate issuers.

Fitch's instrument ratings include an issuer-specific enterprise valuation (EV), which is an important driver of debt issue Recovery Rating (RR) estimates. Instrument ratings include an RR and are notched up or down from the Issue Default Rating (IDR) according to this RR.

The median Fitch EV estimate for RR purposes increased by a relatively large 15% for 26 publicly rated issuers in 2013. The increase is largely attributable to higher assumed going concern EBITDA levels due to the effects of merger activity, with most recent valuation reflecting larger EBITDA size of the acquirers post-merger, or Fitch's estimate of a sustainable post-emergence EBITDA in light of the results of Fitch's bankruptcy EV and recovery case studies.

First-lien leverage is a key influencer for the assigned RRs. The RRs on first-lien debt issues became less robust as first-lien leverage and total leverage increased. Twelve of the 40 issuers in Fitch's sample that had total leverage of greater than 8x EBITDA had at least one first-lien debt issue with an 'RR3' or 'RR4' - and 22 of these had a first-lien-heavy capital structure with at least 60% of total debt at the first-lien level.

Fitch's Recovery Ratings (RRs) - assigned to Corporate issuers rated 'B+' and below - have provided a reasonably accurate predictor of recoveries in a default scenario. Fitch's RRs were within one RR category of the price implied RR, based on 30-day post-default security trading prices for 80% of 115 Fitch-rated debt issues that defaulted between January 2008 and February 2014.

The full report 'U.S. Leveraged Finance: Road to Recovery Ratings' is available at 'www.fitchratings.com.' This latest report includes an analysis of how capital structures and leverage influence RRs.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research: U.S. Leveraged Finance: Road to Recovery (Cross Sector Analysis of Recovery Assumptions and Results)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744855

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