With no bankruptcies or payment misses in October the default rate of the Morningstar LSTA US Leveraged Loan Index fell slightly, to 0.83% by amount, from 0.90% in September.
While this figure remains well below the 10-year-average for the index, individual credit situations are increasing, as distressed volume topped $100 billion in October, the most since June 2020.
By issuer count the default rate, at 0.78%, has risen from a record low of 0.26% in April.
LCD’s criteria for inclusion in the default rate excludes distressed exchanges.
The default rate by amount of 0.83% translates to $10.73 billion of defaulted volume.
Looking at stress signals, the volume of performing leveraged loans priced below 80 cents on the dollar (an anecdotal marker of distress that has shown to be a forward indicator for heightened default activity) rose again in October.
LCD data shows that $100.58 billion of performing loans in the Morningstar LSTA US Leveraged Loan Index were priced at less than 80 cents on the dollar as of Oct. 31. This is the largest volume of loans at distressed levels since June 2020.
With that, the ratio of loans below 80 jumped to 7.11%, from 5.79% in September and 3.19% in August.
At the sector level, Software, Healthcare Providers & Services, and IT Services take the top three slots for loans priced below 80 in the index, at 21%, 16% and 9%, respectively.
Among developing situations in recent months, creditors of long-standing loan issuer Avaya Inc. are reported to have gone restricted as negotiations pick up, according to Debtwire.
The telecommunications and software vendor — which filed for bankruptcy in 2017 — had again warned of its ability to continue as a going concern after it reported a nearly 70% year-over-year decline in adjusted EBITDA in preliminary third-quarter fiscal 2022 results, and at the same time announced that it is working with advisors to assess options relating to its 2.25% convertible notes due June 2023. Avaya has three term loans in the Morningstar LSTA US Leveraged Loan Index totaling $1.89 billion.
A default by Avaya would, hypothetically, lift October’s default rate by par amount to 0.98%.
Also on LCD’s Restructuring Watchlist, Lucky Bucks was downgraded three notches by S&P Global Ratings to CCC, from B, and its outlook was revised to negative, from stable. The agency citied weak second-quarter performance that could lead to a covenant breach or liquidity crisis. The company’s senior secured term loan B maturing in 2027 (L+550, 0.75% floor) and revolver were also downgraded to CCC, from B.
Finally, National CineMedia in October was cut two notches, to Caa3 by Moody’s. The agency cited a potential covenant breach in March 2023 and concern over June 2023 revolver maturities. See LCD’s Restructuring Watchlist for more situations.
On a tear
In a final measure of credit risk trends, downgrades outpaced upgrades for a fifth consecutive month, climbing to 2.47x in October, from 2.28x in September.
Should the pace of downgrades accelerate, history has shown elevated negative ratings actions to be a precursor to rising defaults — albeit a short one.
A jump in the downgrade-to-upgrade ratio in March 2020, to 11.4x, preceded an increase in the default rate of the Morningstar LSTA US Leveraged Loan Index above its (then) 2.58% historical average.
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