BANKING & INSURANCELeveraged Loan Default Volume In The U.S. Has Tripled This Year
Mayra Rodriguez Valladares
Senior Contributor
Oct 2, 2022,02:52pm EDT
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
FITCH RATINGSAccording 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
REV +1% account for 72% of the 2022 default volume. In the second half of 2022, there have been ten defaults totaling $11.6 billion. If this trend continues, we should all worry whether credit will dry up for hundreds of very indebted companies. Moreover, defaulting companies will add to the unemployment rate, which until now has been fortunately low.