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Leveraged Loan Experts Hike US Default Rate Expectations

default rate forecasts

Portfolio managers in the U.S. leveraged loan market have raised their forecasts for near-term default rates by almost 20 bps since the last quarterly survey, though few expect the historical average of 3.1% to be surpassed before the end of next year.

According to LCD’s Default Survey, conducted at the end of each quarter, the consensus now calls for a one-year forward default rate of 2.43%, from a one-year forward rate prediction of 2.24% at the December reading.

More than 50% of loan managers surveyed raised their one-year-out default prediction, by an average of 0.42%. In fact, LCD’s quarterly survey last revealed an increase of this magnitude back in 2016—when borrowers in the oil-and-gas and metals/mining sectors were increasingly inflating the default stats.

Meanwhile, predictions for the 12-month trailing U.S. default rate by principal amount for year-end 2019 came in at 2.81%, an increase from December’s read of 2.64%.

LCD’s U.S. Leveraged Loan Default Rate Survey is conducted by Rachelle Kakouris, who covers the distressed debt market for LCD.

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US Leveraged Loan Default Rate Hits 3-Year High, Courtesy iHeart

The default rate of the S&P/LSTA Leveraged Loan Index jumped to its highest level in three years after iHeartMedia, one of the largest highly levered remnants still standing from the LBO boom, filed for Chapter 11 bankruptcy protection.

The radio giant’s highly anticipated filing included $6.3 billion of Clear Channel term loans, propelling the rate to 2.42%, from 1.7% previously, and marking the fifth largest default in the history of the Leveraged Loan Index.

iHeart default chart 1Though significantly higher than the 18-month low of 1.36% where it stood the end of July 2017, the current rate still remains well inside the 3.1% historical average.

By number of issuers, the default rate is now 1.93%, from 1.94% at the end of February.

As the table below shows, all but one of the 10 largest S&P/LSTA Index defaults on record were products of the 2006/2007 credit boom, or in the case of Energy Future Holdings and Caesars, the resultant LBO boom.

For iHeart’s part, the media giant, formerly known as Clear Channel, filed for Chapter 11 in bankruptcy court in Houston after more than a year of negotiations with its creditors with an agreement in principle to cut its $20 billion debt load by half.

According to a Form 8-K filed with the Securities and Exchange Commission, the company said it expects to formally enter into a restructuring support agreement “in short order.” Court filings show an early challenge from the legacy, pre-LBO noteholder group, is expected to the proposed restructuring deal. (See “iHeart files Chapter 11, sees challenge from legacy noteholder group,” LCD News, March 15, 2018).

As with almost all of its $20 billion debt pile, Clear Channel’s $5 billion D term loan due 2019 (L+675) and $1.3 billion E term loan (L+750) were put in place as part of the company’s 2008 buyout by Bain Capital and Thomas Lee Partners, and extended in 2013.

Finally, following iHeart’s bankruptcy filing, the default rate within the broadcast radio and television sector jumped to 33.59% by amount, from 7.23% previously.

For context, Ocean Rig and Answers Corp. rolling off the calculation has partially offset the impact of iHeart’s default, with the default rate falling from 2% at the end of February, to 1.60% at the beginning of this month upon the removal of the two issuers, and prior to this month’s defaults from iHeartMedia and Harvey Gulf. — Rachelle Kakouris

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As iHeart Looms, US Leveraged Loan Default Rate Tops 2%

US leveraged loan default rate

The U.S. leveraged loan default rate continues to hold well below historical levels, ending February at a relatively slim 2%, according to LCD.

A downgrade of gun manufacturer Remington Outdoor to D was the only default during the month (Remington had been in restructuring talks well before the resurgence of the current gun control debate in the U.S., prompted by the high school shooting in Parkland, Fla.).

Perhaps as important as the actual default rate: Radio/media concern iHeart, with some $20 billion in outstanding debt resulting from an LBO of the company in 2008, has been negotiating a debt swap for nearly a year, and there have been published reports recently saying iHeart could file as early as this weekend. That would entail some $6.3 billion of subsidiary Clear Channel debt, which would lead to a jump in the U.S. leveraged loan default rate to roughly 2.73%, according to LCD. – Staff reports

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iHeart Could Propel Leveraged Loan Default Rate to 3-Year High

iHeart story chart

iHeartMedia is widely expected to trigger a default on its $6.3 billion of Clear Channel term loans D and E after the company yesterday disclosed that it has elected not to make a $106 million Feb. 1 interest payment due to bondholders.

Hypothetically speaking, a default by Clear Channel would push the current 12-month default rate of the S&P/LSTA Leveraged Loan Index, which tracks U.S. credits, to a near-three-year high of 2.67%, from 1.94% currently.

A default by iHeart would displace Idearc as the fifth-largest default among the constituents of the S&P/LSTA Leveraged Loan Index.

The historical norm for the U.S. leveraged loan default rate is 3.1%, according to LCD. – Rachelle Kakouris

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European Leveraged Loan Default Rate Looks to Remain Low Until 2020

european leveraged loan default rate

Investors in the leveraged finance market believe defaults will remain below 2% over the next 12 months, and will not rise back to the historical average until at least 2020, according to an LCD survey of European buyside investors.

But they were also in agreement that low default rates are not necessarily a comfort, as the real risks at the moment are in weaker documentation. “Default rates are becoming less relevant because documentation is so weak,” said one respondent. “Companies won’t default as quickly, so the default rate will be lower, but recoveries will also be lower.”

Default rates for loans in the S&P European Leveraged Loan Index (ELLI) by principal amount hit a record low of 1.16% in November, the lowest point since LCD began tracking this data in 2008. This was down from 1.41% in October, and from 2.43% a year ago in November 2016. – Taron Wade

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European Leveraged Loan Default Rate Drops to Record Low

european leveraged loan default rate

In November, for the fifth month running, there were no defaults among loans in the S&P European Leveraged Loan Index (ELLI). As a result, the European leveraged loan default rate dipped to 1.16%, its lowest point since LCD began tracking this data in 2008, from 1.41% the previous month.

In the 12 months ended Nov. 30 the ELLI tracked €1.3 billion of institutional loan defaults and restructurings, down from €2.3 billion tracked at the end of 2016.

The ELLI default rate is calculated by summing up the par amount outstanding for issuers represented within the index that have defaulted in the last 12 months, and dividing that by the total amount outstanding in the index at the beginning of the 12-month period (excluding issuers that have already defaulted prior to this date).

For the purposes of this analysis, LCD defines “default” as (a) an event of default, such as a D public rating, a D credit estimate, a missed interest or principal payment, or a bankruptcy filing; or (b) the beginning stages of formal restructuring, such as the start of negotiations between the company and lenders, hiring of financial advisors, etc.

An historical low for loan defaults comes at an interesting time for the asset class. First off, the current bull-market credit cycle is chugging along in its ninth year, leading more than a few to speculate that defaults are bound to kick and (and soon).

Also, as credit market bears are fond of pointing out, part of the reason defaults remain low is that more and more issuers now take advantage of ‘covenant-lite’ loan structures, which place fewer restrictions on the borrower. Because of the cov-lite loans, issuers have much more room to maneuver in the face of financial obstacles, often putting off default proper (for a while, anyway, bears will add). – Staff reports

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US Leveraged Loan Default Rate Rises to 13-Month High

US leveraged loan default rate

With four issuers filing for bankruptcy protection in November —Pacific DrillingExGen Texas PowerCumulus Media, and Walter Investment Management—the default rate of the S&P/LSTA Leveraged Loan Index jumped to a 13-month high of 1.95%, from 1.51% at the end of October.

The rate has climbed steadily from an 18-month low of 1.36% at the end of July, but remains well inside the high of 2.17% in July 2016. By number of issuers, the default rate has increased to a 10-month high of 1.72%, from 1.41% in October.

While the rate climbed noticeably last month, loan market players remain relatively sanguine regarding defaults, and the credit cycle in general. Per LCD’s survey of North American portfolio managers and buyside players, the U.S. leveraged loan default rate likely won’t hit its historical average of 3.1% in 2019.

This quarterly survey was conducted in late September. It will be interesting to see if market players adjust their expectations for the next survey, which LCD will publish before year-end. – Rachelle Kakouris

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European Leveraged Loan Default Rate Hits 20-Month Low

european default rate

In October, for the fourth month running, there were no new defaults among loans in the S&P European Leveraged Loan Index (ELLI). As a result, the lagging 12-month default rate by principal amount fell for the fifth-consecutive month, to a 20-month low of 1.41%, from 1.44% the previous month. In the 12 months ended Oct. 31, the ELLI tracked €1.5 billion of institutional loan defaults and restructurings, down from €2.3 billion at the end of 2016.

For the purposes of this analysis, LCD defines “default” as (a) an event of default, such as a D public rating, a D credit estimate, a missed interest or principal payment, or a bankruptcy filing; or (b) the beginning stages of formal restructuring, such as the start of negotiations between the company and lenders, or hiring of financial advisors.

Leveraged loan defaults on both sides of the Atlantic remain in focus as market players ponder just how long the current credit cycle – now in its ninth year – will run. Portfolio managers over the past year or so have been pushing out further on the horizon the window during which they expect defaults to kick in. This is in no small part due to today’s easy access to credit, including the preponderance of “covenant-lite” loans, which place fewer restrictions on borrowers.

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Another Default-Free Month in US Leveraged Loan Market. However …

US leveraged loan default rate

There were no defaults among issuers included in the S&P/LSTA Leveraged Loan Index in August. As such, the U.S leveraged loan default rate for a second consecutive month remained at 1.36%, a 19-month low (there were no defaults in July, either).

The stubbornly low default rate might confound market bears who say we must be nearing the end of the current credit cycle, now chugging along in its ninth year. Portfolio managers say, however, that the U.S. default rate could remain below historical norms until 2019, according to LCD’s latest market survey (conducted at the end of the second quarter).

On the other hand, the default-free run could well end soon, with several restructuring situations currently playing out. In aggregate, these have the potential to propel the loan default rate to double its current level. These issuers include iHeart Media, Pacific Drilling, Walter Investments, and Seadrill. – Staff reports

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US Leveraged Loan Default Rate Falls to 18-Month Low

US leveraged loan default rate

The U.S. leveraged loan default rate dipped to 1.36% in July, the lowest it’s been since January 2016, according to LCD. The default rate is down from 1.54% in June after a blemish-free July (at least among Index issuers).

The dip in defaults comes as market players watch for signs that the current credit cycle – now chugging along in its ninth year – is finally turning. They might have to watch a bit longer.

Per LCD’s quarterly buyside survey of portfolio managers, the U.S. default rate likely will not return to its historical average of 3.1% until 2019. In part, that’s because there are relatively few corporate leveraged loans coming due this year and next, though the “maturity wall” ramps up quickly in 2019 (there’s roughly $41 billion of credits maturing then, according to LCD).

Making matters more interesting: Some 75% of leveraged loans outstanding now are covenant-lite – as opposed to roughly 20% at the end of the last credit cycle. It will be interesting to see how recoveries vary on the more recent batch of loans once the cycle turns, investors say. – Staff reports

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This story first appeared on www.lcdcomps.com, 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.