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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