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
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.