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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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S&P: As Risk, Defaults Rise in Retail, Expect Recoveries to Lag other Sectors

Amid sector challenges and rising defaults, default-related losses are likely to be higher in retail than in other sectors, especially for creditors that are either unsecured or have junior-lien positions, according to a new report published by S&P Global Ratings on Thursday.

Furthermore, with retailers historically showing a higher tendency to liquidate rather than reorganize after default, a separate report also finds that recovery prospects in a liquidation scenario are often dramatically lower than when a company continues to operate. This is because most retailers are asset light, meaning most creditors are highly dependent on profitability and cash flow as a source of repayment.

retail recoveryThe overall credit environment is generally improving amid mostly favorable economic conditions, including modest but steady GDP growth, low unemployment, tame inflation, and healthier household balance sheets. This environment—and more stable oil and gas prices—has contributed to a sharp decline in the speculative-grade default rate, which has dropped from 5.1% at the end of 2016 to 3.8% at the end of June, and now stands below the historical long-term average of 4.3%.

In contrast, distress and default levels are rising in the retail sector, with factors such as adapting to online retailing, rising competition, and shifting consumer tastes and spending habits contributing to the struggles.

In terms of trouble ahead, 18% of U.S. retail ratings are in the CCC category or lower, about double the level at the beginning of the year.

Meanwhile, the market is also signaling concern with the distress ratio —the share of speculative grade issues with option-adjusted spreads more than 1,000 bps above Treasuries—rising to 21% for the retail sector, well above that of the oil and gas sector, which has the next-highest distress ratio for a non-financial sector at 14%.

In the post-default scenario, overall recovery prospects for creditors to U.S. retailers are much lower than those for the greater domestic corporate universe, especially for creditors that are either unsecured or have junior-lien positions.

In the event of liquidation, estimated recoveries in the retail sector would be about 50% lower than going-concern recoveries on average. The full reports entitled “U.S. Retail Debt Recoveries Likely To Be Below Average Amid Sector Challenges And Rising Defaults“, and “U.S. Retail Recovery Prospects: Liquidation Could Lead To Worse Recovery Outcomes,” are available at www.globalcreditportal.com and at www.spcapitaliq.com. — Staff reports

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Leveraged Loans: “Weakest Links” Portend Uptick in Default Rate

Despite the strength of the credit markets, institutional investors are always on the lookout for indicators of market health. To that end, LCD is pleased to introduce for the loan market “Weakest Links” analysis, a barometer we’ve adopted from associates S&P Global Fixed Income Research ($$).

Weakest links are loan issuers rated B– or lower (excluding defaults) by S&P Global with a negative outlook or implication.

At the end of 2Q17, that measurement is 6.4% for the S&P/LSTA Leveraged Loan Index, up sharply from 4.4% at the end of 2015 but down from 7.7% at the end of 2016.

weakest link share of market

The trend holds if we exclude the troubled Oil & Gas industry from the past 18 months. The share of weakest links excluding O&G is 5.5% currently, higher than the 4% reading from 18 months ago but lower than the 6.3% level at the start of 2017.

The hump-shaped pattern over the past 18 months mimics the default rate over the same time. Currently, the default rate based on issuer count is 1.3% (down from 1.49% last month). This is up from the 1.1% seen 18 months ago but down from 2.1% at the start of 2017.

Where are they now?
Just how weak are the weakest links? Over time, how do they perform? To address these questions we look back 18 months, to the year-end 2015 weakest links, and assess their status today.

At the end of 2015, the Index’s weakest links consisted of 42 issuers with $37 billion of par outstanding. Eighteen months later, it seems that they really were the weakest links: 40% of those issuers have defaulted, 31% remain weakest links, 19% have improved out of the weakest links category, and 10% have withdrawn their ratings (half of those were due to positive changes; the other half withdrew their ratings after a subsequent downgrade).

Despite the fact that O&G was in the midst of its crisis 18 months ago, excluding O&G does little to change the analysis. Without O&G, the year-end 2015 weakest links comprised 36 issuers with $32 billion of par outstanding. Eighteen months later, 36% of those issuers have defaulted, 36% remain weakest links, 19% have upgraded, and 8% have withdrawn their rating.

As would be expected, the default rate for the weakest links is significantly higher than for the broader market.

Looking at the 2015 year-end population, the default rate for issuers rated B or higher is 0.4%, as only three out of those 771 issuers defaulted over the following 18-month period. For those issuers rated B– or lower with a positive or stable outlook, the default rate rises nearly 18x, to 7%, as six of those 86 issuers defaulted. And among the weakest links, the default rate increases again nearly 6x, to 40%, as 17 out of 42 issuers defaulted.

weak links 3

The market’s bull run over the past 18 months has significantly changed the risk/reward analysis on the weakest links. At the end of 2015 the average bid for weakest links was 68.50, 25% below the average bid of 92.46 for the broad Index. The demand for paper that has driven this bull market over the past 18 months has driven the average bid for the weakest links up nearly 20 points, to 87.07, just 11% below the average bid of 97.51 for the broad Index.

weak links 4

Hopefully, the recent swing in favor of supply over demand will help deflate the secondary market. The future uptick in default rates is inevitable, as evidenced by the rise in the percentage of weakest links versus year-end 2015. Including the issuers already in default, if we assume that 36% of the current weakest links default in the coming 18 months, that would push the default rate based on issuers up to about 3.8%, well above the rates seen during the O&G default peak in 2016. — Ruth Yang

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Gymboree Estimates Post-Reorg Equity Value at $244–444M

gymboree logoGymboree said that the potential range of its reorganized enterprise value on a going concern basis would be $400–600 million, and that assuming net debt of $156 million, the range of the company’s reorganized equity value would be $244–444 million.

According to an amended disclosure statement filed by the company on June 29 with the bankruptcy court in Richmond, Va., based on that valuation term loan lenders are estimated to recover 31–57% of their secured claims (estimated at $164–364 million) under the company’s proposed reorganization plan.

According to the disclosure statement, the company had $788.8 million outstanding under its pre-petition credit agreement as of the petition date. After a $70 million DIP roll-up (see below), however, and the elimination of a $20 million claim owed to a particular lender that is excluded on account of the company’s assumption of a separate agreement with that lender, the remaining total outstanding claim under the credit agreement was $699 million, plus accrued and unpaid pre-petition interest. The non-secured portion would constitute an unsecured deficiency claim under the plan, for which the recovery is zero.

As noted, certain of the company’s pre-petition term lenders provided the company with a $105 million term DIP facility, comprised of a $70 million term loan roll-up facility and $35 million of new money. Under the proposed reorganization plan, the roll-up facility would be exchanged for 41% of the reorganized company’s equity, while the new money DIP would be replaced by the $35 million exit term facility.

Lenders are to receive subscription rights to a pair of backstopped rights offerings representing 46.9% of the reorganized company’s equity for $80 million, calculated at a purchase price carrying a 35% discount to a stipulated reorganized equity value of $262.5 million (based, in turn, on a total enterprise value of $430 million).

Lenders are also to share in the remaining equity reduced by the DIP repayment, the rights offering, and backstopped fees, and further diluted by a management incentive plan.

Thus, on a pro forma basis (before the MIP dilution) the contemplated transactions would result in equity ownership in the reorganized company as follows: term loan lenders that contribute their pro rata share of the $35 million new-money DIP and their pro rata share of the rights offering will obtain the benefit of the $70 million DIP term loan roll-up and ultimately share in 89.6% of the equity in the reorganized company, with an additional 2.4% of the equity distributed to those lenders backstopping the rights offering. Non-participating term lenders would receive the remaining 8% of reorganized equity.

According to the disclosure statement, holders of 99% of the term loan claims support the restructuring-support agreement on which the proposed reorganization plan is based.

Lastly, the disclosure statement notes that on June 22, the U.S. Trustee for the Richmond bankruptcy court named an unsecured creditors’ committee in the case, comprised of Hansoll Textile; GGP Limited Partnership; PREIT Services, LLC; Deutsche Bank Trust Company Americas; Simon Property Group, Inc.; Hutchin Hill Capital Primary Fund, Ltd.; and Li & Fung Centennial Pte Ltd. The committee has retained Hahn & Hessen LLP as its legal counsel and Protiviti as its financial advisor.

On June 28, the panel’s attorneys, who are admitted in New York, sought permission to appear in the Richmond bankruptcy court. Other than that, the panel does not appear to have taken any legal action in the case.

As reported, the company has paid its critical trade creditors, and under the plan remaining unsecured creditors, comprised of the company’s unsecured notes with $171 million in principal amount outstanding, the secured loan deficiency claim that ranges from $335–535 million, and other general unsecured claims of $35–48 million.

The bankruptcy court scheduled a hearing on the adequacy of the proposed disclosure statement for July 24. Under the proposed timetable laid out by the company, following disclosure statement approval the voting deadline would be Aug. 24, and a confirmation hearing would be held on Sept. 7.

The company initially filed its proposed plan and disclosure statement on June 16. As reported, the company filed for Chapter 11 on June 12 after reaching a restructuring-support agreement with two-thirds of its term lenders. — Alan Zimmerman

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Europe Corporate Default Rates Set to Stay at Historic Lows – S&P

European corporate debt defaults are set to remain well below historic averages in the coming year despite a slight increase in the April rate, according to a report from S&P Global Ratings. Recoveries too are at levels not seen since 2004, in what completes an upbeat assessment of the state of European credit, the agency adds.

In its annual study of European defaulted non-financial corporate debt instruments, S&P said it expected the 12-month default rate to remain in the 2% area throughout 2017. This is well below the 3.3% average seen between the years 2002–2016, according to Tom Ewing, a credit analyst for S&P Global Ratings.

European defaults are also well below global averages, despite an increase in the 12-month trailing default rate to 2.1% in April from 1.8% in March. The global default rate, in comparison, stood at 3.8% at the end of April.

european leveraged loan default rate

According to LCD, leveraged loan defaults in Europe have been ticking higher of late, though they remain below historical lows. More broadly, S&P says corporate defaults in Europe will remain low. 

Energy – and specifically oil and gas – remains a key problem area globally, and is responsible for 20% of S&P’s so-called ‘weakest links’. These are strong predictor of defaults, according to S&P, and are defined as issuers or issues rated B- or lower and on negative outlook or CreditWatch with negative implications. Europe is responsible for 12.1% of the weakest links globally, through 28 situations — up from 11.5% of the global total last year.

In all 38 instruments from 12 issuers went through a recovery situation and emerged in 2016, says S&P. Overall senior secured recoveries during 2016 were in excess of 90%, which is the highest level since 2004. Senior unsecured recoveries meanwhile were at 60.2%, up from the long-term average of 50.9%. Mean recovery rates for first-lien debt stood at 73.6% in 2016, which was little changed on the year.

The study covers 1,245 instruments over a 13-year period from 2003 to 2016. At the time of default, the issuers of these debt instruments either had a corporate credit rating or a credit estimate from S&P Global Ratings. The face value amount of debt covered by these instruments increased to $220.7 billion, from $185.6 billion. — David Cox

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European Leveraged Loan Default Rate Jumps in May

european leveraged loan default rate

The default rate of the S&P European Leveraged Loan Index jumped by 91 bps in May, to 2.61% by principal amount, according to LCD. In the 12 months ended May 31 the ELLI tracked €2.6 billion of institutional loan defaults and restructurings, up from €2.3 billion at the end of last year.

Note, two issuers joined the roster. One of them is Swissport Group, which announced a technical default and is working with independent financial and legal advisors to complete a debt restructuring that will improve its capital structure. The name of the second issuer is private.

The ELLI is a leveraged loan market benchmark tracking performance and defaults in the asset class. You can learn more about the Index here. – Marina Lukatsky

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