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Blemish-free November trims US leveraged loan default rate to 3.89%

Capital Markets View – February 2021


LCD Monthly: Demand for US loans puts borrowers in the driver's seat

Capital Markets View – January 2021

2021 Leveraged Loan Survey: Defaults edge higher; credit quality a concern

Blemish-free November trims US leveraged loan default rate to 3.89%

After 13 consecutive months featuring at least one default among the constituents of the S&P/LSTA Leveraged Loan Index, there were none in November. This reprieve, though met with diminishing distress levels amid the broader market rally, remains challenged by tepid corporate earnings and elevated leverage levels that could further pressure debt-servicing capacity.

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With no defaults recorded, and $2.26 billion rolling off the trailing 12-month calculation, the default rate by amount fell to 3.89% in November, from 4.11% in October and a nearly 6.5-year high of 4.17% in September. November’s rate marks a five-month low, but remains a full percentage point above the 2.87% historical average.

By issuer count, the rate eased to 4.27%, from 4.48% in October and a 10-year high of 4.64% in September.

Despite the decline in the trailing rate, the volume of defaults remains a staggering 179% ahead of last year’s pace, at $46.3 billion.

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Among the drivers in 2020, Oil & Gas continues to make up more than a quarter of all default activity year to date, at 27%. Retail follows at 12%, and Telecommunications at 11%.

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Turning to the forward landscape and pricing signals for potential trouble spots, stressed and distressed loans lessened drastically in November to levels not seen since July 2019.

Driven entirely by the broader vaccine-driven market rally (as opposed to default activity) the share of performing loans priced below an average of 80 cents on the dollar fell to just 2.76% at the November month end, from 4.85% in October. This impressive comeback from the 57%, March 23 peak, puts the share of loans at this informal marker of distress at the lowest it has been in 16 months.

Similarly, the share of loans in deeper distress, with an average bid below 70, fell to just 1.29%, the lowest since July 2019.

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While the loan market has, in aggregate, bounced back from the pandemic-driven crash, rolling distress among the sectors remain firmly in place.

Taking the top spot among the industries with an index share of more than 1%, Leisure, having had minimal loans in distress at the end of last year, has kicked Oil & Gas off the top spot with a sector-level distress ratio of 12%. Oil & Gas — an ever-present feature in the restructuring world — had a sector-level distress ratio of 10% at the end of November, a massive improvement from 64% in April attributed, in part, to outsized default activity from the sector.

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While the secondary market might be signaling minimal distress, a third consecutive quarter of negative earnings among the public filers of the S&P/LSTA Leveraged Loan Index sees the share of issuers with the highest solvency concerns (of leverage of greater than 7x) near-unchanged from the record highs from a brutal second quarter for EBIDTA decline.

In a preview of LCD’s soon to be published credit stats data for publicly filing S&P/LSTA Index issuers, an eye-watering 32% carried leverage of greater than 7X in the third quarter, double the proportion a year earlier, and up from 14% at the cycle low for leverage, in the fourth quarter of 2018.

In a measure of loan issuers’ ability to service debt, the share of companies with an average interest coverage of less than 3x — a level that typically initiates a closer eye from investors — eased slightly to 39% in the third quarter, from a 6.5-year high of 41% in the second quarter. Encouragingly, that latest reading is significantly better than where it stood at the end of 2007 (when LCD published this data annually), where 51% of companies were operating with interest coverage of less than 3x.

In terms of loans coming due or becoming current next year, the volume of loans maturing in 2021-2022 had fallen to $39.2 billion as of Nov. 27, a 64% reduction on what was outstanding at the end of last year.

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