Leveraged loan default rates are rising and the default volume is three times higher than last year.
The default rate this year has been rising both in high yield loans and leveraged loans. It is not as high as it was in 2020 or certainly not what it was in 2009. The fact that the default rising is important, however, because we are now in a very high inflationary environment globally. Rising central bank rates make it expensive and challenging for companies to refinance. Banks that lend to leveraged companies will have to be attentive to measuring rising risk weights and capital associated with these assets. Investors in the loans and bonds of leveraged companies or funds with those assets in them could also take losses due to the deteriorating credit quality of these assets and the volatility in asset prices caused by market nervousness about rising defaults.
US Institutional Leveraged Loan and High Yield Bond Default Rates
According to the “Fitch U.S. Leveraged Loan Default Insight,” the 2022 leveraged loan default volume so far this year totals $22.2 billion, three times higher than the $6.3 billion volume at this time in 2021. Cineworld, Diamond Sports, Envision, Endo, Lumileds, and Revlon
Institutional Leveraged Loan Default Volume by Month
The aftermath of the pandemic and rising inflation have particularly hurt the media and telecommunications sectors. Yet, risk managers cannot blame everything on the pandemic. Alternative distribution patterns, changes in how consumers adopt nascent technologies have challenged media companies. Companies that were already leveraged or which had other strategic problems were also impacted by the obsolescence.
Eric Rosenthal, Senior Director – Leveraged Finance
According to Eric Rosenthal, Senior Director – Leveraged Finance, “Fitch believes broadcasting/media and telecommunications, combined, could produce roughly 30% of default volume in 2023, resulting in 10% and 7% sector default rates, respectively. Diamond Sports Group LLC, which completed a significant distressed debt exchange (DDE) in March, is showing a high likelihood of defaulting again in 2023. Entercom Media Corp., National CineMedia LLC and Checkout Holdings Corp., which filed in December 2018, are notable broadcasting/media issuers on Fitch Rating’s Top Market Concern Loans list. On that list, Avaya
Market Concern Loans Total Highest Since March 2021
Additionally, other sectors such as technology, leisure/entertainment, healthcare/pharmaceutical, and building materials are worth watching as well since they could generate significant defaults in 2023. Liftoff Mobile Inc., for example, ranks as a sizable issuer in Fitch Ratings’ Tier 2 Market Concern list. The leisure/entertainment default rate and volume are dependent on AMC Entertainment
Monthly Bid Price Movers: Loyalty Ventures, Genesis Care Lead Decliners
Source: https://www.forbes.com/sites/mayrarodriguezvalladares/2022/10/02/leveraged-loan-default-volume-in-the-us-has-tripled-this-year/