Daily News: December 18, 2015

Fitch: 2016 U.S. Leveraged Loan Default Rate Projected to Rise


According to Fitch Ratings, the trailing 12 month (TTM) U.S. institutional leveraged loan default rate is forecast to rise to 2.5% in 2016. This rate would result from the $24 billion in defaults — nearly a 50% increase in volume from the current TTM, and more than the defaulted volumes tallied in 2011-2013 combined.

“To date, the leveraged loan universe has been much more insulated from commodity-related challenges than the high yield bond market, but it’s not exempt,” said Eric Rosenthal, senior director of Leveraged Finance. “We expect those challenges to persist in 2016, contributing to anacceleration in leveraged loan defaults.”

The TTM leveraged loan default rate stood at 1.7% at end-November. Vantage Drilling, Energy & Exploration Partners and Magnum Hunter Resources filed for bankruptcy since then, adding $1.8 billion of default volume to the tally. A likely filing from Dex Media by year end would bring the default rate closer to 2%. The TTM default rates for the energy and metals/mining sectors stood at 5.9% and 12.7%, respectively at end-November. The three December energy defaults brings the TTM rate to 10%.

Outside of energy and metals/mining, the retail sector continues to face pressure from shifting consumer spending habits while healthcare/pharma saw secondary weakness due to contagion concerns from Valeant.

While bids in the energy and metals/mining sectors have been particularly pressured in the secondary market, loan trading prices have retreated more broadly due to lackluster demand and persistent loan fund outflows. The institutional term loan market traded at an average bid of 93.5 at end-of-day on December 14th. This is down from 95 one-month earlier. Removing energy and metals/mining moves the average to 95.