High yield bond defaults in 2003 declined significantly from record 2002 levels closing the year at $38.5 billion for a default rate of 4.66%. The fourth quarter’s rate of 0.36% was the lowest quarterly rate since the fourth quarter of 1997. The default loss rate for 2003 also declined to just 2.76% based on a weighted average recovery rate of about 45% -- a majorimprovement from the 25% levels of the prior several years. Fourteen of the 86 defaultingcompanies had issues that were investment grade sometime prior to default. These fallenangels accounted for 33% of defaulting issues and 46.3% of the defaulted volume in 2003.The high-yield bond market returned an impressive 30.62% for the year, the third highest one-year return since 1978 (when we first began tracking returns). The return spread over ten-year US Treasuries was a record high 29.4%, bringing the historic average annual return spread to 2.22% per year. The concurrent yield spread at year-end fell to 3.74%, the lowest year-end figure since 1997 and 4.82% less than one year ago. New issues in 2003 recorded anear record level of $137.4 billion; the vast majority was used for refinancing existing loan and bond issues.Based on our mortality rate methodology and assuming different measures of credit risk ofrecent new issuance, we expect default rates to continue their decline in 2004 to between3.2% - 3.8%, with rates increasing in 2005 to above 4.0%.
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