LEVERAGED-LOAN DEFAULTS AT HIGHEST LEVELS IN A DECADE
As is certainly apparent by now, no part of the U.S. economy is safe from the ravages of the coronavirus. The latest evidence of this unfortunate truth is last month’s spike in defaults on leveraged loans.
On Wednesday, Rachelle Kakouris of S&P Global Market Intelligence reported 11 such defaults in April, which surpassed the previous monthly record of 10 in October 2009. Noted Kakouris, “By number of defaults, the current 2.71% default rate is the highest since December 2010.” Seemingly no sector is spared in the composition of leveraged-loan defaults for the year to date, but none is so imperiled as Oil and Gas, which accounts for almost a third of all default activity as persistent rock-bottom oil prices from the demand shock due to COVID-19 have effectively dried up oil companies’ cash flows and rendered them increasingly unable to cover their debts.
In March, Fitch Ratings upped its default forecast for all of 2020 from 3% to 5%-6%. Fitch also predicts a default rate of 8%-9% for 2021 and warns that it could reach double digits. Clearly, if no solution to the pandemic emerges in the near term, companies of all stripes will be unlikely to resume full operations to start clearing some of the red from their ledgers. Before long, leveraged-loan defaults could be just one of many notorious records broken.