Rachelle Kakouris

During times of near-zero interest rates, when the important buffer afforded by sub debt arguably is less important, this cushion was three times higher than it is today.

The recent spike in leveraged loan defaults is the steepest since the onset of the coronavirus pandemic, in 2020.

Leveraged loan borrowing rates have soared, usually-aggressive investors are shying away from risk and issuance has dwindled. It might not be a full-blown credit crunch, but how bad is it?

The US leveraged loan default rate has remained stubbornly low for years, even amid the 2022-23 market turmoil. But with one of the busiest bankruptcy days ever recently, that’s changing.

The count of Weakest Links — an indicator of potential default activity — increased in the first quarter as leveraged loan issuers grappled with tightening credit conditions.

Despite tightening lending conditions, the tally of LCD’s European loan Weakest Links—a measure of loan issuer vulnerability—decreased in the first quarter of 2023.

The steep drop in leveraged loan fund AUM during March brings total assets under management for the sector to $107 billion, the lowest that number has been since April 2021.

The banking fallout and further tightening of credit conditions has put a spotlight on the ability of companies to refinance debt at a time when the volume of near-term maturities among the riskiest of loans is larger than it has ever been. Breaking the maturity wall down, 69% of debt due by the end of 2024 is rated B- or lower, or is unrated.

At $4.42 billion the volume of U.S. leveraged loan defaults tops the $4.28 billion from October through February. Over the past 12 months the $18.37 billion is the most since May 2021.

Assets under management at mutual funds and ETFs investing in US leveraged loans have been taking big hits lately as retail investors retreat from risk, amid still-rising rates and market continued volatility.