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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