latest-news-headlines Market Intelligence /marketintelligence/en/news-insights/latest-news-headlines/leveraged-loan-news/led-by-retail-and-telecom-us-loan-default-rate-tops-historical-average content esgSubNav
Log in to other products

Login to Market Intelligence Platform


Looking for more?

Contact Us
In This List

Led by retail and telecom, US loan default rate tops historical average

Fed rally & default fears bring bifurcation back to leveraged loans

Loan Downgrades Are the Biggest Concern for the European CLO Market

Industry-Specific Losses Stand Out In Leveraged Loan Market As COVID-19, Oil Fears Globalize

Europe’s Leveraged Loan Issuers Draw on Revolving Credits to Preserve Liquidity

Led by retail and telecom, US loan default rate tops historical average

The $1.2 trillion U.S. leveraged loan market saw another $10.54 billion of defaults in May, the busiest month, by volume, for this activity since 2014. Following a record number of defaults in April, May crossed additional milestones: The 2.85% historical default average was breached for the first time in more than five years, and the Retail sector once again climbed to record highs.

In the broader S&P/LSTA Leveraged Loan Index, the default rate by issuer count, at 3.29%, is now at its highest level since September 2010. By amount, the rate climbed to 3.14%, from 2.32% in April and 1.39% at the end of 2019.

SNL Image

The eight new corporate defaults across 12 facilities lifted the trailing-12-month default volume in May to $37.4 billion, 271% ahead of last year’s pace.

READ MORE: Request a demo of LCD to see more stories and complimentary research

SNL Image

Car rental concern Hertz Global Holdings Inc. on May 22 became the eighth issuer in the S&P/LSTA Loan Index to default on its term debt in May.

SNL Image

If discounting the outsized influence of the $19.5 billion default of Energy Future Holdings Corp in April 2015, May would have marked the highest monthly default volume since March 2009.

Moreover, the asset class, save for this one issuer, would have trailed its aforementioned historical average default rate for nearly 10 years.

Retail records
A trio of prominent retail chains in the U.S. — J. Crew, Neiman Marcus and J.C Penney — helped push the default rate of the retail sector to 13.64%, a record high.

SNL Image

In terms of share across the index, Retail was unsurprisingly the biggest contributor of defaults in May, at 27%, followed by Telecommunications — made up solely of Intelsat loans — at 23%. On an LTM basis, Oil & Gas leads, at 20% of all loan defaults.

SNL Image

Downgrades continue, distress ebbs
Forward measures continue to show a market that is pricing in an elevated period of defaults going forward.

The volume of loans below the anecdotal 80 measure of distress, at $134 billion, is significantly higher than the $44.5 billion where it stood at the end of 2019.

As a result of the repricing of risk in the leveraged loan market from pre-coronavirus levels, almost no loans have been bid above par at the closing levels since March 13, and 25% of the market is still priced below 90, from just 10% at the end of 2019.

Twelve percent of loans are priced below 80, from just 4% at the end of 2019, and 6.5% below 70, up from 2%.

SNL Image

Among the sectors with a more meaningful Index share (above 1%), Oil & Gas, non-food Retail, and Leisure sport the highest distress ratios at the sector level.

SNL Image

While consumers in general are still scaling back on their spending, a survey conducted by 451 Research, an offering of S&P Global Market Intelligence, shows that they plan to start shopping at retail stores as soon as state and local restrictions on movement and non-essential businesses ease.

The survey, based on responses from 1,250 people collected between April 30 and May 18, primarily in the U.S. and Canada, found that 55% of respondents said they would immediately spend money at "personal services" establishments like hair salons and massage parlors. Forty-four percent of consumers surveyed by 451 Research said that they plan to start shopping at retail stores.

SNL Image

While the pace of downgrades slowed in May, to 90 loans, from a record 228 in April and 114 in March, it remains elevated by historical standards. December, by comparison, had just 26 loan downgrades.

On a three-month rolling basis, the ratio of downgrades to upgrades climbed to 43.2x in May—another record high reading. This is up from 22.1x in April, and 11.4x in March.

It was just 3.8x in February.

SNL Image

Given the mounting downgrades, the composition of the B– cohort has changed significantly. Out of the $269 billion in loans currently occupying this ratings bucket, $79.4 billion, or roughly 30%, have been downgraded to this level since March 1.

For comparison, only 17% of B flat outstandings come from post-coronavirus downgrades ($55 billion out of $320 billion). The CCC+ bucket saw the biggest impact from the recent spike in downgrades—out of the $86.6 billion outstanding, 71%, or $61.9 billion, resulted from a downgrade in the last three months.

SNL Image

SNL Image

This story was written by Rachelle Kakouris, of LCD's Research group.

Request a demo of LCD to see more stories and complimentary research

Follow LCD on Twitter.

LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.