Leveraged loan default rate nears record low at 0.20%

Just 13 months removed from the cycle peak, the U.S. leveraged loan default rate slipped to a near-record low of 0.20% in October, measured by amount. Ready market access that is allowing companies to push out debt maturity profiles at record low yields continues to support a benign environment for distress and defaults.

With $2.7 billion rolling off the trailing calculation, an Oct. 31 Chapter 11 filing from cloud networking provider GTT Communications Inc. only partially offset the declining rate, which has consistently trended downward from 4.17% in September 2020.

According to LCD, this is the lowest the leveraged loan default rate has been since December 2011, when it fell to just 0.17%, and it is only 5 basis points off the record low of 0.15% in June 2007.

LCD's calculation does not include distressed exchanges.

With only four bankruptcies or payment misses recorded among index issuers so far in 2021, compared to 50 during the comparable period of 2020, the default rate by issuer count fell to 0.35%, the lowest since December 2007.

After missing an interest payment to bondholders in June and operating under forbearance with lenders since October 2020 following the company's failure to file its financials, GTT Communications filed a petition for Chapter 11 in the Southern District of New York to shed nearly $3 billion of debt.

The company used proceeds of the sale of its infrastructure division to I Squared Capital to pay down a portion of its term loan to $870 million, from $1.7 billion previously, according to court documents.

The loan was placed in 2018 to fund, together with $425 million of equity, the company's acquisition of European fiber network operator Interoute and to refinance existing debt at total net leverage of 5.3x.

A final look at stress indicators shows little change from the prior month. The share of index loans priced below 80 is at a near 7.5-year low, at 0.70%. As this chart illustrates, market distress has proven an important leading indicator for future default rates, with the exception of an isolated April 2014, $19.5 billion default by TXU.

Against this backdrop of minimal distress, sector-level distress remains highest in broadcast, radio and television, at nearly 13%. Among other sectors with an index share over 1%, distress in autos crept slightly higher, to 4.69%.

Finally, the pace of upgrades of loan facilities in the S&P/LSTA Leveraged Loan Index outnumbered downgrades for a ninth consecutive month in October, at a count of 56 to 33 on a rolling three-month basis.

Over the history of the index, the default rate and the downgrade/upgrade ratio have cycled in a relatively synchronized manner. The rolling three-month ratio of upgrades to downgrades eased to 1.7x in October, from 1.9x in September and 2.5x in August, the highest ratio of upgrades to downgrades since June 2011.