The default volume of leveraged loans in the US has tripled this year

The default rate has increased this year for both high-yield and leveraged loans. It’s not as high as it was in 2020, or certainly not as high as it was in 2009. However, the fact that defaults are rising is important as we are now in a very high inflation environment globally. Rising central bank interest rates make refinancing expensive and difficult for companies. Banks that lend to leveraged companies need to be careful to measure the increasing risk weights and capital associated with those assets. Investors in loans and bonds issued by leveraged companies or funds with these assets could also suffer losses due to the deteriorating credit quality of these assets and the volatility in asset prices caused by markets’ nervousness about mounting defaults.

According to Fitch US Leveraged Loan Default Insight, total leveraged loan default volume in 2022 so far this year is $22.2 billion, three times the volume of $6.3 billion at this point in time Year 2021. Cineworld, Diamond Sports, Envision, Endo, Lumileds , and Revlonrev
account for 72% of the default volume in 2022. In the second half of 2022, there were ten defaults totaling $11.6 billion. If this trend continues, we should all be concerned about credit drying up for hundreds of heavily indebted companies. In addition, defaulting companies will increase the unemployment rate, which has been fortunately low so far.

The fallout from the pandemic and rising inflation have particularly hurt the media and telecoms sectors. However, risk managers cannot blame everything on the pandemic. Alternative distribution patterns and changes in how consumers embrace emerging technologies have challenged media companies. Companies that were already leveraged or had other strategic problems were also affected by obsolescence.

According to Eric Rosenthal, Senior Director – Leveraged Finance, “Fitch believes that broadcast/media and telecom together could produce about 30% of default volume in 2023, leading to default rates of 10% and 7% across the sectors, respectively. Diamond Sports Group LLC, which completed a major distressed debt exchange (DDE) in March, shows a high probability of defaulting again in 2023. Entercom Media Corp., National CineMedia LLC and Checkout Holdings Corp., which applied in December 2018, are notable broadcast/media issuers on Fitch Rating’s Top Market Concern Loans list. On that list, AvayaAVYA
Inc. and Mitel Networks Corp. are large telecommunications companies of the highest market importance.