Fitch Study: Institutional Loans Expanding Faster than High-Yield Bonds
In a new study, Fitch Ratings examines default and recovery trends in the U.S. institutional leveraged loan market. The institutional loan market expanded at a substantially faster clip than the high yield bond market in 2013 — up 26% year over year (to $725 billion) versus 12% for high yield ($1.265 trillion). Momentum has continued into 2014 with outstanding volume reaching $755 billion in February.
Default activity across high-yield and leveraged loans has been similar since 2007, both in magnitude and direction. This is due to the shared speculative-grade sensitivity to macro conditions. In addition, approximately 40% of institutional loan volume is associated with companies that also have high-yield bonds in their capital structure. The performance of these joint issuers affects both areas.
The report offers a view of 30-day post-default and emergence price results and distributions specific to: first lien, second lien, cov lite, broadly syndicated loans, large middle market, loan-only, loan and bond-issuers.
Emergence price-based recovery outcomes showed considerable range over the period 2007–2013. First-lien recovery rates averaged 74% of par across broadly syndicated loans (BSL); 55.5% of par isolating large middle market (LMM) issues; 71.4%, cov lite; 81.8%, joint or overlap issuers; and 53.7%, loan only issuers.
Fitch Ratings’ research has shown that in times of stress, post-default loan prices are less predictive of ultimate recovery. This dynamic reappeared in the recent downturn and was exacerbated by the severity of the financial crisis. For a group of 59 companies that defaulted in the liquidity-constrained environment of 2008 and 2009 and later emerged from bankruptcy, first-lien loan prices rose from an average of 56% of par at default to 74% of par at emergence.