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US Leveraged Loan Maturity Wall – Nothing to See Here (until 2023)

With the U.S credit market creaking loudly in December – before rebounding somewhat in January –  leveraged loans once again were thrust into the spotlight, with observers citing loosening underwriting standards and the massive amount of outstandings as areas of special interest.

While those are legitimate concerns, the defaults that can mount as credit cycles deteriorate might have to wait a while this time around.

While the U.S. leveraged loan market now totals some $1.15 trillion in outstanding debt, relatively little of it will come due over the next few years, as borrowers have taken full advance of an accommodating market in 2017 and 2018 to lock in thinly priced debt.

Indeed, this year there’s but a scant $8 billion of U.S. leveraged loans that will mature, according to LCD. That number was roughly $44 billion as of December 2017, though refinancings and repricings reduced that amount dramatically.

Loan maturities step up a bit in 2020, to $25 billion, and to $69 billion in 2021. But it’s not until 2022 when maturities really start to kick in, with $118 billion due. Maturities peak in 2025 – seven years from now, or the length of some credit cycles – when there is $351 billion due.

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Global High Yield Default Tally Dips to Lowest Level in 2 Years

The 2018 global corporate default tally remained at 76 this week, the lowest total for this point in December since 2015, according to a report by S&P Global Fixed Income Research.

The U.S. continues to hold the highest share of corporate defaults this year, with 44 (58% of the total), followed by emerging markets with 16, Europe with 11, and other developed markets (Australia, Canada, Japan, and New Zealand) with five.

By sector, oil and gas leads the default tally with 14 defaults, or 18% of the total, followed by retail and restaurants with 11, or 14% of the total.

Distressed exchanges continue to be the leading cause of defaults in 2018, with 27 defaults, followed by missed principal and interest payments (including defaults on debt obligations) with 24 defaults, bankruptcy with 16 defaults, and regulatory intervention with one default. The remaining eight defaults were confidential.

In terms of the trailing-12-month rate, the U.S. speculative-grade corporate default rate remained at an estimated 2.64% in November, while the European speculative-grade corporate default rate decreased to an estimated 1.93% in November, from 1.94% in October, according to S&P Global. — Rachelle Kakouris

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US Leveraged Loan Default Rate Dips to 1.61%

leveraged loan default rate

Despite two fresh triggers from the embattled retail sector, the U.S. loan default rate fell to a 13-month low of 1.61% in November, according to the S&P/LSTA Leveraged Loan Index

The rate, down from 1.92% in October, has declined significantly after hitting a three-year high of 2.42% at the end of the first quarter.

By volume, the total of default debt outstanding slipped to $15.3 billion in November from $18 billion in October, as four issuers—Pacific DrillingExGen Texas PowerCumulus Media, and Walter Investment Management—rolled off the 12-month calculation.

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With David’s Bridal Filing, US Leveraged Loan Default Rate Rises stands at 1.61%

The default rate of the S&P/LSTA Leveraged Loan Index now stands at 1.61% by principal amount after David’s Bridal filed for Chapter 11 in bankruptcy court in Delaware.

With Pacific DrillingExGen Texas PowerCumulus Media, and Walter Investment Management all rolling off the 12-month calculation in November, the rate dipped to 1.44% at the beginning of this month, having closed out October at 1.92%.

david's bridalBy issuer count, the rate is now 1.56%, down from 1.79% at the end of October.

It its Disclosure Statement filed this morning, the company cited “challenging bridal retail market conditions,” including increasing competition at the lower price points from online retailers, and its substantial debt burden as reasons behind its decision to seek relief in bankruptcy court.

The filing, which was expected, came after the company announced that a restructuring support agreement had been reached with 85% of its term loan lenders and 97% of its senior noteholders, as well as its principal equity holders, on a deal to reduce the company’s debt by more than $400 million and hand ownership to senior lenders.

Pre-petition term loan lenders, which are expected to recover approximately 70.8%, would get 76.25% of the reorganized equity, while those who participate in the $60 million new-money DIP financing would get an additional 15% of the new equity, court filings show. Holders of its unsecured notes, which have an estimated recovery of 4.4%, would receive around 8.75% of the reorganized equity, in addition to warrants.

The issuer’s originally $520 million covenant-lite TLB was placed in October 2012 to back Clayton, Dubilier & Rice’s acquisition of the retailer from Leonard Green & Partners, which retained a minority stake in the business.

The company said it has sufficient liquidity to meet its business obligations, noting that it has obtained commitments for $60 million in new DIP financing from its current term loan lenders and a recommitment of its existing $125 million ABL revolving credit facility.

A confirmation hearing is set for Jan. 7 ahead of expected emergence from bankruptcy in early January. — Rachelle Kakouris

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Leveraged Loan Default Rate Dips Again After Third Straight Blemish-Free Month

leveraged loan defaults

For a third consecutive month there were no new defaults among constituents of the S&P/LSTA Leveraged Loan Index. Consequently, the default rate fell to a 10-month low of 1.81% in September, from 1.99% in August.

Though the rate has declined significantly from the three-year high of 2.42% at the end of March, it remains well inside the 3% historical average where, as detailed below in LCD’s quarterly default survey of loan portfolio managers, it is expected to stay for a couple more years.

By issuer count, the default rate fell to 1.59%, down from 1.71% at the end of August.

This marks the first three-month default-free streak in the Index since August 2014, though some potential situations loom.

The well-flagged 30-day grace period on American Tire’s missed Sept. 1 interest payment, for one, is set to expire at the end of September. Tweddle Group, meanwhile, is said to be negotiating a deal to equitize its term loans.

Other Index issuers whose debt is trading in technical distress include American Commercial LinesCaelus EnergyCatalina MarketingEmpire Generating Co.Longview PowerDavid’s BridalFullBeauty BrandsCrossMarkPetcoPhillips Pet Food & SuppliesCTI FoodsDixie ElectricAcademy LtdAcosta, and Revlon, among others. – Staff reports

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US Leveraged Loan Default Rate Holds at Low 1.97%

After a blemish-free July, the default rate for U.S. leveraged loans continues stubbornly low, holding at 1.97%, according to LCD.

The rate has been inside the historical norm of 3.1% since early in 2015, when the behemoth TXU/Energy Future default, which entailed more than $20 billion of outstanding loan debt, was part of the calculation (that issue dropped off the 12-month roll in April 2015).

U.S. leveraged loan defaults have remained scarce as the current issuer-friendly credit cycle heads into its tenth year.

One reason for the lack of defaults: corporate earnings continue robust, enabling borrowers to service debt they incur (unless they refinance it, of course).

Speaking of refinancing: Easy access to leveraged loans is another reason defaults have been rare.

With interest rates rising, institutional and retail investors have been throwing cash into this floating-rate asset class, allowing issuers to quickly refinance existing debt or – more alarming to some – structure the credits with few restrictions. In theory, these covenant-lite loans could allow borrowers to gloss over poor financial performance, with little warning for investors, until the company defaults. – Staff reports

This story was abstracted from analysis by LCD’s Rachelle Kakouris

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Covenant-lite Leveraged Loans: After Default, Whither Recoveries?

Covenant-lite has been the talk of the leveraged loan market for a while now.

Specifically, when the current, long-running credit cycle finally turns, how much less will investors recover on these loosely structured deals, if they end up in default, than on defaulted loans offering traditional safeguards?

covenant-lite loan recoveries

It is far from an academic question. Right now roughly 78% of the more than $1 trillion in outstanding U.S. leveraged loans are cov-lite, compared to just 29% in 2007, at the peak of last credit cycle (and just before the financial crisis).

Cov-lite loans place fewer restrictions on a borrower than do traditionally structured credits. They have soared in popularity over the past few years as institutional and retail investors have poured tens of billions into the U.S. leveraged loan asset class, looking to take advantage of continued rate hikes by the Fed – leveraged loans are floating rate – and, recently, a steady rise in LIBOR.

For a glimpse into how the current cov-lite market dominance might hinder recoveries on leveraged loans in cases of default, LCD looked at average recoveries on cov-lite credits undertaken prior to 2010 – before the financial crisis – and those undertaken after 2010 (so-called cov-lite 2.0), using data from LossStats.

While the data set for recent-vintage cov-lite loans that have entered and emerged from the default/distressed exchange/bankruptcy processes is necessarily thin – leveraged loan default rates have been stubbornly low for much of the current credit cycle – it offers insight into how today’s cov-lite loan binge might impact recoveries.

Specifically, the average discounted recovery rate on cov-lite loans undertaken before 2010 is 78%. That figure drops to 56% for cov-lite loans originated in 2010 and after, according to LossStats.

For purposes of this analysis LCD has used discounted, as opposed to nominal, recoveries. Because restructurings can last years (and years), eliminating the noise of time is important to maintain comparability. The discounted recovery time-values the nominal recovery back to the date of default using the pre-petition default rate, normalizing recoveries over long periods of analysis, and creating parity among the recovery outcomes from various events.

It is important to note, again, that the data set for cov-lite is thin indeed. There are only 40 of those defaulted instruments in total, and only 13 in the 2010-or-later pool. We should also bear in mind that this pool represents cov-lite debt that has defaulted, then recovered. The lurking danger of cov-lite is not just the risk of poor recoveries. It is also the risk of “zombie” credits that do not default, but simply limp through a prolonged downturn. The costs and risks to investors in that scenario is not captured in these recovery numbers.

That being said, there are clear indicators that cov-lite issued after the credit crunch—the 2.0 incarnation—will be more problematic in recovery than were its 1.0 predecessors.

This story is abstracted from a longer piece of analysis by LCD’s Ruth Yang, based on data from S&P’s LossStats.

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Market Pros: US Leveraged Loan Default Rate to Remain Low, but Creep Higher

us default forecast

Portfolio managers of U.S. leveraged loans expect default activity to continue its modest ascent over the next 18 months, with the long-anticipated spike above historical averages materializing in 2020, according to LCD’s latest buyside poll.

On average, managers predict the one-year-forward default rate of the S&P/LSTA Index to finish June 2019 at 2.46%, up slightly from the previous one-year-forward prediction of 2.43% polled in March, versus the current default rate by amount of 1.95%.

Managers, in the near term, say they continue to see idiosyncratic risk as the main driver of loan defaults, rather than a broad-based uptick at a systemic level.

Conducted in June before the end of the second quarter, LCD’s Default Survey also asked portfolio managers their predictions on the loan default rate at the end of 2019. The consensus estimate was 2.65% by then, a slightly more bullish read this time around, with managers reining in the forecast from 2.81% at the March reading (but keeping it close to their 2.64% prediction from December).

Historically, U.S. leveraged loan defaults have averaged roughly 3.1%.

The default rate has been of particular scrutiny over the past year or so for two important reasons. First, the current, borrower-friendly credit cycle is approaching its 10th year, an unusually long stretch. And, related, with the ubiquitousness of loosely structured covenant-lite loans in today’s market, many observers are concerned that, once the credit cycle does turn, defaults could pile up quickly, as traditional protections for lenders/investors – a set of covenants – no longer are routinely structured into loan agreements. – Rachelle Kakouris

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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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