The default rate of the S&P/LSTA Leveraged Loan Index has fallen to 0.47%, marking a low since March 2012, as easy lending conditions, supported by the Federal Reserve, continue to suppress corporate balance sheet restructurings.
Despite a new default by Glass Mountain Pipeline — the first default since February — the near yearlong trend of plunging default rates continued as 2020 pandemic-era defaults roll off the 12-month trailing calculation.
By amount, the default rate, at 0.47%, is down from 0.58% in July, and 370 basis points below the September 2020 pandemic default cycle peak of 4.17%.
The default rate by issuer count is the lowest it has been since October 2015. Note that the LCD data does not include distressed exchanges.
Breaking a five-month hiatus of defaults in the leveraged loan market, Glass Mountain Pipeline was downgraded on Aug. 9 to D from CC, after the company missed the July 30 interest payment due on its outstanding debt.
The crude oil transportation system company serving the Granite Wash and Mississippi Lime plays had faced increasing liquidity challenges due to a reduced revenue base as companies dialed back on drilling activity. The issuer's $300 million term loan B was placed in 2017 to fund its buyout by BlackRock Global Energy and Infrastructure Fund and Navigator Energy Services.
Then and now
As LCD has previously noted, the transition from default cycle to benign credit cycle in leveraged loans has occurred at a swift pace. Per LCD's data, following the 10.81% November 2009 default peak, the loan default rate did not fall below 1% for 17 months, compared to 10 months this time around. By way of background, the default rate by amount fell to a low of 0.17% in November 2011.
The question, of course, is how long the benign default cycle will last. As detailed in an Aug. 3 LCD report, a stretch of sub-1% defaults following the financial crisis lasted for 13 months. With that in mind, LCD takes a look at the loan market fundaments of then and now.
In terms of debt levels, the average leverage ratio of loan issuers in the S&P/LSTA Leveraged Loan Index that report publicly fell to 4.92x from 5.36x in the first quarter. In the second quarter of 2011, when the loan default rate dipped below 1% following the financial crisis, leveraged was slightly more elevated, at 5.15x.
In terms of the ability of companies to service their debt, average interest coverage compares much more favorably this time around, at 5.6x, versus 3.9x in the second quarter of 2011. Cash flow coverage also improved, at 3.6x, compared to 2.8x in the second quarter of 2011.
For more coverage on the credit metrics of publicly filing companies in the S&P/LSTA Leveraged Loan Index, see "Loan-issuer leverage plunges as earnings climb 21% from pandemic depths."
Conversely, the ratings quality mix is significantly less favorable to the comparable benign default period of 2011. At the end of August, just over 30% of issuers in the loan market were rated B- or below. This compares to 17% in August 2011.
In another read of sentiment, the ratio of upgrades to downgrades of loan facilities in the S&P/LSTA Leveraged Loan Index continues apace. In the three months through the end of August, upgrades outnumbered downgrades at a ratio of 2.5x, marking the seventh consecutive month the rolling count of upgrades exceeded downgrades and the highest ratio of upgrades to downgrades since June 2011.
Meanwhile, the market continues to price little in the way of future default activity, with just 1.2% of performing loans priced below the anecdotal measure of 80 cents on the dollar. This compares to the distress cycle peak of 57% on March 23, 2020.
By industry, the sector-level distress ratio in the leisure sector jumped to 6.8% in August, from just 1.4% in July. Broadcast, Radio and Television continued to lead with a sector-level distress ratio of 12.9%.