The share of at-risk issuers designated “Weakest Links” in the European leveraged loan market declined slightly in the third quarter of 2024 amid a benign loan default environment, with issuers tapping this year's strong market to refinance debt and extend maturities.
A forward indicator for potential future default activity, LCD’s Weakest Links metric tracks companies rated B-minus or lower (excluding defaulted deals) by S&P Global Ratings that have a negative outlook or implication, and are therefore on the cusp of a downgrade to the vulnerable triple-C category.
This analysis is based on credits in the Morningstar European Leveraged Loan Index (ELLI). If a credit exits the ELLI, it remains in the Weakest Links category until its rating is withdrawn or it defaults, or the issuer nets an upgrade or improvement in the outlook on its corporate credit rating. The category would therefore only shrink when more loans exit this cohort — due to a default, a ratings upgrade, an improvement in outlook or a ratings withdrawal — than join it.
The list of Weakest Links at the end of the first quarter included 18 credits, representing 5.47% of the overall European loan market — down just slightly from 19 (5.81%) recorded in Q2, and below 20 (6.71%) in Q3 2023.
None of the Weakest Links credits defaulted in the third quarter. On average over the last 10 quarters, two credits in the cohort have defaulted, with the last peak of four defaults back in Q3 2023.
Default rate
The ELLI default rate continued to fall in the third quarter, to 0.79% on a trailing 12-month basis, and fell slightly further on the same measure to the end of October. The default rate had been rising steadily from early 2023 — peaking in January and February at 1.86% (the rate in both months), which is the highest this measure had been since March 2021.
As for the share of Weakest Links in the C rating segments, 39% of these credits were in the triple-C, double-C or single-C rating buckets at the end of the first quarter, down from 42% at the end of Q2 2024.
Entry point
Tracking when credits became Weakest Links, roughly 56% joined the cohort in 2023, with 28% joining in Q3 2023 specifically. Some 39% of the companies joined the cohort during the first three quarters of 2024.
Sector watch
Breaking down the analysis by sector, there was very little change from the prior quarter.
The Computers & Electronics (LCD’s designation for the Technology segment) and Chemicals sectors were the largest contributors to the Weakest Links cohort in the third quarter, accounting for four companies each. Entertainment & Leisure was the runner up, with three credits.
Meanwhile, there was only one entrant to the Weakest Links cohort in Q3 — and two exits.
Axplora (European Medco Development 3 Sarl, previously PharmaZell GmbH) left the group of Weakest Links as S&P Ratings raised the outlook to stable from negative in August. The stable outlook here reflected the agency’s expectation that Axplora's S&P Ratings-EBITDA will increase within a €95 million-€100 million range, and its FFO cash interest coverage will be above 2x in the upcoming two fiscal years — based on recovered operating efficiency from recent restructurings. Furthermore, the agency expects the new Novasep leadership to help restore profitability and drive top-line growth by strengthening customer relationships and cost management.
BVI Medical (formerly Beaver-Visitec International), which is a subsidiary of BVI Mayfair Holdings, also left the cohort as its outlook changed from negative to developing. The developing outlook reflects the possibility that S&P Ratings will raise or lower its rating on BVI based on its ability to address its upcoming debt maturities.
Ingenico (Poseidon Bidco) was the one company to enter the Weakest Links cohort. S&P Ratings on Sept. 20 downgraded Poseidon BidCo to B- from B+, saying liquidity was “less than adequate.” It assigned a negative outlook, reflecting the “likelihood that the capital structure could become unsustainable if the market demand does not come back in the near term, leading to sustainably elevated debt to EBITDA, negative FOCF generation, and further liquidity pressure.” The agency also said Ingenico — which specialises in payment acceptance and services, and is owned by Apollo — will “materially underperform our latest 2024 and 2025 expectations, due to a sharp market decline and slow recovery mainly in North America.”
In other activity, just after the quarter wrapped, Accell Group (one of the Q3 Weakest Links credits) announced it had completed a liability management exercise (or distressed exchange). S&P Ratings downgraded the company to SD as Accell Group's parent company Sprint HoldCo B.V. announced it had reached an agreement with the majority of its creditors to execute a debt restructuring, which the agency said was distressed and tantamount to a default because the company’s lenders will receive less than they were originally promised.
Background noise
There are other signs of stress in the background. Another measure that shows a deterioration in the fundamental picture versus the previous quarter is the ELLI distress ratio, which is a keenly watched indicator of future default activity, defined as loans priced below 80 in the secondary market. This ratio was 3.06% at the end of the third quarter — up from 2.52% at mid-year (at the end of October it was slightly higher, at 3.33%).
In addition, the ratio of downgrades to upgrades in the ELLI has been increasing, with this measure standing at 3.67x at the end of the third quarter (on a rolling three-months basis). By the end of October, this ratio had reached 4.50x, its highest level since January.
Sustained higher interest rates have put operational pressure on the balance sheets of more-challenged companies in 2024, and some of these credits have faced rising leverage and liquidity pressure. However, the sheer scale of refinancings and amend-to-extend activity this year has helped borrowers push out near-term maturities, which will help keep liquidity pressure off. The bulk of the outstanding universe of the ELLI now matures in 2028 and 2029 (64%), with only 1% maturing in 2025, 4% in 2026 and 10% in 2027.
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