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Alternative Market Briefing

Leveraged lending default rate plummets

Monday, January 03, 2022

Bailey McCann, Opalesque New York:

The default rate for leveraged loans hit a record low in 2021, according to data from Fitch Ratings. The 2021 institutional leveraged loan default rate stands at 0.6%, the lowest level in a decade and well below 2020's 4.5%.

2021 default volume tallies only $9.7 billion compared with $68.1 billion one year ago while the number of defaults is at 21 versus 92 at this point in 2020. The combined Market Concern Loans total fell for the 20th consecutive month and is now 2% below the pre-pandemic level.

The data is a positive for investors that stuck with the space over the past two years as regulators scrutinized whether or not leveraged lending was becoming a systemic risk. According to Fitch, a new solution has emerged for loans that are under pressure. Loan distressed debt exchanges (DDE) are becoming a more routine default remedy. DDEs account for 40% of 2021 default volume compared with the 12% average during 2007-2020. By issuer count, DDEs make up 57% of defaults. This is a noticeable rise from 22% of volume and 27% on a count basis generated last year.

Fitch anticipates that DDEs will become more common over the next year, especially within the lower mid-market. Middle market loan issuers are more vulnerable to rising interest rates than large corporate issuers, given floating-rate, debt-heavy capital structures and the likely limited use of hedges. DDEs could come to be the preferred solution for this segment of the marke......................

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