The leveraged loan default rate by amount declined sharply in June, falling to 0.97%, from 1.35% in May, as there were no defaults during the month to impact the rolling 12-month calculation. The drop was driven largely by SFR’s June 2025 default falling off the legacy default list. SFR, a telecom company and affiliate of Altice France, accounted for roughly $5.65 billion of term debt included in the Morningstar LSTA US Leveraged Loan Index (LLI) at the time of its default.
By issuer count, the default rate ticked down to 1.34% for the month, from 1.42% in May.
There were also no liability management exercises in June, and the dual-track default rate posted a modest pullback to 2.77% in the month, from 3.11% in May.
Bucking the trend, the distress ratio rose 34 bps to 6.87% in June, from 6.53% in May. That move brings the reading, which reflects the proportion of loans valued at less than 80 cents on the dollar, back in line with levels seen in April (6.83%) after May’s decline, but it remains below the YTD peak of 7.23% in March.
As of June 30, the trailing 12-month default rates of the Morningstar LSTA US Leveraged Loan Index (LLI) were as follows:
- Payment default rate by amount: 0.97%, down from 1.35% in May.
- Payment default rate by issuer count: 1.34%, down from 1.42% in May.
- Dual-track default rate by issuer count: 2.77%, down from 3.11% in May.
Current payment default rate levels track within the running five-year and 10-year average monthly default rates, which edged down to 0.96% and 1.51%, respectively, on a month-over-month basis.
Dual-track default rate
LCD’s monthly default report features the legacy payment default rate and, by count, a dual-track default rate for index issuers conducting distressed liability management exercises (LMEs). More details and the methodology can be found here.
Sixteen index issuers that conducted LMEs over the past 12 months are reflected in last month’s dual-track default rate, compared with 36 issuers in the calculation for June 2025.
There were no new LMEs last month, and three such transactions from June 2025 dropped off the list, resulting in the 34 bps dip month-over-month to 2.77% in June.
Based on the PitchBook LCD Default Predictor, we estimate a six-month forward default rate of 1.69% by issuer count on legacy defaults. The Default Predictor is a regression model that utilizes loan prices to derive a six-month default rate estimate on loans held in the Morningstar LSTA US Leveraged Loan Index.
Although legacy payment defaults have remained relatively low, ranging from 13-17 each month over the past year on a trailing 12-month basis, the number of LMEs has fallen dramatically over that span, reaching the aforementioned 16 at the end of last month, down from 36 in June 2025. The June 2026 LME count is the lowest level since August 2023, which had 15.
Proportionately speaking, June’s 16 LMEs accounted for 52% of the trailing 12-month count used to calculate the dual-track default rate, down from a peak share at 73% in July 2025.
From a sector standpoint, Healthcare Providers and Services accounted for 22% of LMEs in the last 12 months through June 30, trailed by Consumer Staples Distribution and Retail at 13% and Automobile Components at 9%.
In May, Healthcare Providers and Services accounted for only 14% of LMEs on the same basis, while the IT Services and Software sectors were next, with 10% shares.
The distress ratio by amount (defined as the share of loans trading below 80 cents on the dollar) rose 34 bps month-over-month to 6.87% in June, wiping out May’s decline of 30 bps to 6.53%.
The distress ratio has trended higher over the past nine months after plumbing a near-term low of 2.59% in September 2025. It was at 3.06% in June 2025. The peak for 2026 is 7.23% in March, which was the result of six consecutive monthly increases and marked the highest level since the distress ratio hit 7.36% in December 2022.
The ratio of loan facility downgrades to upgrades rose to 1.25x in June on a rolling three-month basis, from May’s reading at 1.18x. The May level was the lowest reading since LCD began tracking this dataset in late 2022.
As for market sentiment, when asked to select an expected range for the loan default rate by amount at year-end, 41% of respondents to PitchBook LCD’s Q2 US Leveraged Finance Survey picked the 1.50-1.99% bucket, while 35% of those surveyed anticipated a default rate from 2-2.99%, 19% went with 1-1.49%, and 6% offered no opinion.
Featured image by Tiero/Getty Images
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