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Alternative Market Briefing

Credit quality worsens in leveraged lending

Monday, January 04, 2021

Bailey McCann, Opalesque New York:

New data from S&P Global suggests that investors should be wary of credit quality within the leveraged lending market.

LCD recently surveyed buy-side and sell-side participants in the leveraged lending market to gauge sentiment heading into 2021. According to respondents, credit quality - over default activity - was cited as the main concern for leveraged loans in 2021, accounting for 26% of the responses. Many companies have higher levels of debt on their balance sheets at a time when economic growth remains uncertain. That's forced some investors to rethink their measures of credit quality.

Listed companies within the S&P/LSTA Leveraged Loan Index reported a 23% year-over-year decline in EBITDA in the second quarter on average. By the third quarter, an eye-watering 32% of public filers in the index carried leverage of greater than 7x, double the proportion a year earlier, and up from 14% at the cycle low for leverage, in the fourth quarter of 2018. If concerns about performance grow over the near term, investors will likely be taking a close look at documentation with the hopes of avoiding any surprises.

This year's downgrade cycle has also lowered overall credit quality within the leveraged lending market. Loan downgrades outnumbered upgrades by a record-breaking 43:1 in the three months through May 2020. The share of index loans rated B- or lower (excluding defaulted credits) at the corporate level rose to 33% i......................

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