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The Secured Lender
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January 8, 2024
Source: Yahoo Finance
After 24 issuers defaulted in 2023, the default rate of the Morningstar LSTA Leveraged Loan Index climbed to 2.05% by issuer count at the end of December, from 1.94% in November.
The default rate increased 137 basis points in 2023 from the end of 2022, when it stood at 0.68%, and it's now 179 bps above the record low rate of 0.26% recorded in both April 2022 and December 2007.
By amount, the default rate stood at 1.53% as of Dec. 31, up 81 bps from the end of 2022.
To put the year-end level in context, the historical average default rate (by amount) for the leveraged loan market is 2.67%, and the 10-year average is 1.83%. Though up from a 10-year low of 0.19% by principal amount and the 2007 low watermark of 0.15%, the current level is well shy of the pandemic default-cycle peak of 4.17% in September 2020. The all-time record high of 10.81% was reached in November 2009.
The 24 payment defaults — the highest tally for a trailing 12-month period since April 2021 — translate to total default volume of $21.5 billion on that basis in the December reading. This compares to $9.7 billion across eight issuers at the end of 2022.
Among the notable defaulters, Diamond Sports Group and Envision Healthcare contributed $3.85 billion and $2.86 billion, respectively.
For December’s default rate, Luxembourg-based pigments manufacturer Heubach Group entered into a forbearance agreement with its term loan and revolving credit facility lenders in anticipation of missing fourth-quarter interest payments. The agreement provides relief until April 30, 2024.
“We understand that Heubach will miss the interest payments due on Dec. 31, 2023, and March 30, 2024,” S&P Global Ratings lead analyst Nikolaos Boumpoulis said in a Dec. 28 report downgrading the company and its term loan and revolving credit facility to D.
According to S&P, the weakening in Heubach's credit metrics is largely due to a combination of two factors: The downturn in the pigments industry, which started in the second half of 2022 as a result of stagnant demand and customer destocking, and cost disadvantages given its mostly Europe-based production footprint.
These factors, the agency said, led to a deterioration in the company's operating rates and margins. In addition to challenging economic conditions, the company also faced high costs from its acquired majority stake in Clariant AG's pigments business.
Sector share
Breaking the 2023 default picture down, Media saw the highest volume of defaulted loans in the index by amount, with a share of 22.6%, followed by Health Care Providers and Services at 20.4% and Software at 11.0%.
Non-sponsored companies continue to exhibit higher default rates than their sponsored counterparts, though note that LCD’s criteria in its payment default rate excludes distressed exchanges, which are more likely to preserve the equity stake held by private equity owners and their control of the company, explaining this trend in large part.
With that said, the loan default rate for sponsored companies in December was 1.60% by issuer count, versus 2.73% for non-sponsored. This differential has widened with the increase in default activity in 2023. At the end of 2022, the default rate by issuer count for sponsored companies was 0.67%, versus 0.68% for non-sponsored.
Looking ahead, an increase in the share of downward rating revisions and feedback from market watchers implies the lagging effect of higher interest rates may result in an increasing default rate in 2024, with the rate, per LCD’s quarterly leveraged finance survey, expected to move closer to historical averages.
Nevertheless, the share of performing loans priced below 80 — a line in the sand for the loan distress ratio and a demonstrated indicator for heightened default activity — eased to 4.54% at December's close, from 5.34% at the end of November.
On the flip side, rating agencies took a more negative stance in December. The ratio of downgrades to upgrades climbed to a seven-month high of 2.42x in December. The three-month rolling calculation increased from 1.68x in November and 1.60x in October.
This article originally appeared on PitchBook News
