U.S. Leveraged Loan Chart Book: Second-Quarter 2020 - Issuance Drops, Quality Migrates Amid Coronavirus Disruptions - cloudfront.net
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U.S. Leveraged Loan Chart Book: Second-Quarter 2020 Issuance Drops, Quality Migrates Amid Coronavirus Disruptions July 29, 2020
Corporates
Leveraged Finance
United States
Contents
Recent Trends in the U.S. Leveraged Loan Market 3
Section 1 — Primary Market Trends 4
Section 2 — Loan Quality 14
Section 3 — Recovery and Default Outlook 24
Appendices — Fitch Ratings Frequent Leveraged Finance Publications 42
Contacts 44
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Recent Trends in the U.S. Leveraged Loan Market
The U.S. Leveraged Loan Chart Book captures the evolving trends in the leveraged loan market through charts and succinct commentary using
Fitch Ratings’ proprietary information, fortified by external data, to discuss developments in the primary market, review loan quality, highlight recovery
estimates on current loans and review recent defaults. Highlights are as follows:
Primary Market — Low Leveraged Loan Activity Logged in Second-Quarter 2020 as Coronavirus-Related Effects Felt
• Coronavirus-related effects were felt throughout second-quarter 2020 (2Q20) with U.S. institutional leveraged loan activity well below 1Q20.
• Most metrics demonstrate a relatively lower risk tolerance in the 2Q, with a jump in average spreads for broadly syndicated loans (BSL), a higher
proportion of ‘BB’ category issuance and Documentation Scores on recent transactions indicating successful lender pushback.
• LIBOR benchmark levels have fallen to ultra-low levels, lowering the debt service burden as most loans refer to the variable rate.
• The average leverage for BSL LBOs eased slightly to 6.5x from 6.7x at YE 2019, although sample size was small at six deals. Enterprise valuations (EV)
remained lofty at 12.7x on average, unchanged from 1Q20. LBOs in 2020 with closing leverage of more than 7.0x were at 40%, with equity contributions
ranging from 23% to 61% .
Loan Quality — Net Downgrade Activity Changes Rating Mix
• Net downgrade activity pushed the proportion of outstanding first-lien institutional loans rated ‘BB–’ and better down incrementally in June compared with
March, while those rated ‘B–’ and lower now represent 28.2% of the market, up from 19.8% at YE 2019.
• Almost all sectors saw a downward rating shift. Food, Beverage & Tobacco and Automotive had the most issuers dropping to the ‘B’ category from the
‘BB’ category. Leisure & Entertainment and Metals & Mining had the most issuers dropping to the ‘CCC’ to ‘C’ range from ‘B’. Most industries saw a higher
proportion of loans fall into the ‘CCC+’ to ‘C’ category compared with last quarter, with the overall average at 10% from 7%.
• The top industry classifications for downgraded exposure in CLOs were Business Services, Gaming, Leisure & Entertainment, and Retail.
Default and Recovery — Defaults Increase, Loans of Concern Ease
• The July TTM institutional term loan default rate has topped 4% for the first time since May 2010, with $5.1 billion of volume so far this month.
YTD defaults tally $48.7 billion and are tracking toward Fitch’ projected $80 billion by year end, corresponding to the 5%–6% rate.
• Fitch’s analysis of cases with available data finds that median bankruptcy date utilization rates for cash flow facilities and for asset-backed loans (ABLs)
is 91% and 79%, respectively. Revolvers exhibit strong recoveries in default. ABL recoveries averaged 97%, while cash flow revolvers averaged 83%.
Ninety-three percent of ABL facilities and 58% of cash flow revolvers received full recovery.
• Fitch’s Top Loans of Concern total outstanding has declined by 31% from its April peak to $47.6 billion. The decline is due to recent defaults, partially offset
by some additions over the past couple of months.
• Fitch’s Top Loans of Concern and Tier 2 Loans of Concern lists combined total stands at $247.8 billion and makes up 17% of the index.
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Section 1
Primary Market Trends
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Primary Market | U.S. Leveraged Loan Issuance
• U.S. institutional leveraged loan issuance dropped heavily in 2Q20, 2Q20 Volumes Dropped Significantly due to the Pandemic
the first full quarter issuers had to deal with the coronavirus (U.S. Institutional Loan Issuance)
pandemic. There were few new deals and little refinancing activity. New Money (LHS) Refinancing/Repricing (LHS) New Money Share (RHS)
• New U.S. institutional leveraged loan issuance was a mere $23 billion ($ Bil.) (%)
in 2Q20, compared with nearly $63 billion in 1Q20. There was more 1,000 85 84 100
75 74
than a month hiatus in overall activity from March 2 to April 6. 800 503 80
58 59
• On the demand side, new CLO issuance picked up in each month of 600 48 50 409 48 48
390 59
60
41 43 42 43
2Q20. The number of CLOs to price was up in 2Q compared with 1Q, 36 36 38
33
400 111 47 40
but dollar amounts were lower. Refinancing and reset activity was 92 235 221 167
194 119
non-existent in 2Q. 200 64 70 117 101 274 315 10 32 102 155
231 220 175 200 305
341
239
127
5
20
• CLOs’ share of the institutional market tipped toward 60% as retail 0
35 49 106 140 59 24 104 112 148 63 23 0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
1Q20
2Q20
funds experienced continued outflows.
• There is $20 billion of term loan issuance either in market or in the
pipeline as of July 21, according to LevFin Insights (LFI), a Fitch Group Source: Refinitiv LPC.
company. This compares with $63 billion at the same time last year.
CLOs Market Share Rises as Loan Fund Outflows Continue U.S. CLO Issuance Lags 2019 but Momentum Builds in 2Q20
(Investor Share of U.S. Institutional Loan Outstandings) BSL CLOs Refinancing/Reset CLOs MM CLOs
CLOs Loan Funds (Mutual Funds & ETFs) Other ($ Bil.)
280
(%) 240
70 200
60 160
120
50
80
40 40
30 0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD 2019
YTD 2020
20
10
0
8/12
2/13
8/13
2/14
8/14
2/15
8/15
2/16
8/16
2/17
8/17
2/18
8/18
2/19
8/19
2/20
CLO – Collateralized loan obligation. BSL – Broadly syndicated loan. MM – Middle market. Note: YTD June 30, 2020.
BSL CLOs include new and reissued transactions. BSL, MM and Reset CLOs are counted at pricing date, while
CLO – Collateralized loan obligation. ETF – Exchange-traded fund. refinancings are by closing date. The few refinancings/resets prior to 2016 are not captured.
Source: Refinitiv LPC. Source: Fitch Ratings, The Royal Bank of Scotland, public information.
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Primary Market | Leveraged Loan Issuance by Sector, Rating
• More than half of issuances were rated ‘B+’ and below, but the Double B Issuance Rises in 2Q20
proportion rated ‘BB–’ and higher ticked up in 2Q20. (Institutional Loan Market Issuance Ratings Breakdown and Evolution)
≥ BB B ≤ CCC
• Technology, Telecommunication, and Services & Miscellaneous had the (% of Total Rated Issuance)
most issuance. Healthcare & Pharmaceutical dropped from the top 3. 100 2 1
4 12 5 7 8 4 3 3 3 3 4
• Notable new issuances in 2Q20 included: 80
19
44 27
44 48 49
49
• T-Mobile USA, Inc (Telecommunications; BB+/Stable) priced a 60 36 46 53 50 55
52 59 62 53
$4 billion term loan at L+300bps in June to support its merger 40 27
69
with Sprint Corporation (BB+/Stable). 20 45
55
42 42 43 47 49 45 38
48 43
29 37 37
• Delta Air Lines, Inc. (BB+/Negative) launched a $1.5 billion 0
three-year term loan during the quarter along with $3.5 billion of
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
1Q20
2Q20
five-year secured notes. Pricing for the term loan was at L+475bps
with a 1.0% floor. Note: Rating categories include +/– modifiers. Figures for 2016 and onward uses end of period ratings
instead of rating at issue.
• Caesars Entertainment Corporation issued a $1.8 billion Source: Fitch Ratings, Refinitiv LPC, Bloomberg.
five-year term loan at L+450bps to support the merger with
Eldorado Resorts, Inc. Technology, Telecommunication and Services Make Up the Bulk of Issuance
(Institutional Loan Issuance) ($ Bil.)
0 2 4 6 8 10 12
Technology 9.6
Telecommunication 7.0
Services & Miscellaneous 6.0
Transportation 5.3
Gaming, Lodging & Restaurants 4.1
Utilities, Power & Gas 3.7
Broadcasting & Media 3.4
Consumer Products 3.1
Leisure & Entertainment 2.4
Chemical 1.7
Industrial & Manufacturing 1.2
Retail 1.2
Insurance 0.9
Energy 0.7
Banking & Finance 0.6
Healthcare & Pharmaceutical 0.3
Food, Beverage & Tobacco 0.3
Building & Materials 0.2
Paper & Containers 0.2
Source: Fitch Ratings, Refinitiv LPC, Bloomberg.
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Primary Market | Institutional Loan Spreads
• The average ‘B’ and ‘BB’ institutional loan spreads both moved higher Credit Spread Increased for Both B and BB Rated Issuers in 2Q20
in 2Q20, as coronavirus concerns were felt in the market. However, (Average Primary Institutional Loan Spreads by Rating)
(bps) BB B
the gap between the rating levels eased in the latter half of the
1,200 TTM
quarter. 1,076
600
1,000
• The average spread on ‘B’ rated institutional loans, including 400
760
+/– modifiers, was 464bps for 2Q20 transactions; up from the 421bps 800
average for deals in 1Q20 and 425bps average for 2019. 600
200
464
• For ‘BB’ institutional loans, the average was 305bps, up from 400 305
226bps for 1Q20 and 261bps for full-year 2019.
200
• LIBOR benchmark levels are trending downward as a result
0
of interest rate cuts. The three-month LIBOR ended 2Q at 0.3%.
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
1Q20
2Q20
The majority of loans have a 0% LIBOR floor currently.
Source: Refinitiv LPC.
• The all-in interest costs for borrowers with ‘BB’ and ‘B’ loans
consequently declined for the fourth consecutive quarter.
Sharp LIBOR Drop Lowers Borrowing Costs at BB and B Levels Sharp LIBOR Drop Lowers Borrowing Costs at BB and B Levels
(New Issue BB Institutional Term Loan Total Rates) (New Issue B Institutional Term Loan Total Rates)
Three-Month LIBOR BB Spread Three-Month LIBOR B Spread
(%) (%)
12 12
10 10
8 8
6 6
4 4
2 2
0 0
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19
1Q20
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19
1Q20
Note: Fourth-quarter 2008 data outlier spread not shown. Note: Fourth-quarter 2008 and first-quarter 2009 data outlier spreads not shown.
Source: Refinitiv LPC, Federal Reserve Bank of St. Louis. Source: Refinitiv LPC, Federal Reserve Bank of St. Louis.
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Primary Market | Benchmark Rates
Comparison of Loan Benchmark Rates
Three-Month LIBOR One-Month LIBOR SOFR Three-Month Average SOFR One-Month Average SOFR
(%) 5.25%
3.15%
3.0
Emergency Fed Establishes
2.5 Rate Cuts Money Market
Mutual Fund
2.0 Liquidity Facility
1.5
1.0
0.5
0.0
December 2018
February 2018
December 2019
May 2018
February 2019
January 2018
April 2018
July 2018
January 2019
April 2019
May 2019
July 2019
February 2020
May 2020
March 2018
June 2018
August 2018
January 2020
April 2020
July 2020
March 2019
June 2019
August 2019
March 2020
June 2020
September 2018
November 2018
October 2018
September 2019
November 2019
October 2019
SOFR – Secured Overnight Financing Rate. Note: Data through July 13, 2020.
Source: Federal Reserve Bank of St. Louis, Federal Reserve Bank of New York.
• Rates have slid to ultra low levels as the Federal Reserve (the Fed) eased monetary policy in response to coronavirus pressures on the economy.
The one-month and three-month LIBOR rates were 0.16% and 0.30%, respectively, at the end of June, compared with 1.76% and 1.91% at YE 2019.
• The Secured Overnight Financing Rate (SOFR), which is expected to become the reference rate to replace LIBOR, dropped to 0.10% from 1.55% in
the same period.
• There is no indication that the plan for LIBOR to become unsupported after 2021 will be delayed due to the coronavirus pandemic.
• The Loan Syndications & Trading Association noted regulators stated they would focus on how institutions are preparing for LIBOR cessation in
their reviews. The Alternative Reference Rates Committee during the quarter published a “Best Practice Recommendations” and “Timeline”.
• Since the Treasury started tracking SOFR, there were several occasions where the overnight rate was more volatile than LIBOR. The overnight
rate would be smoothed though the use of average or compounded rates over time.
• Most leveraged loans have LIBOR floors, which are supportive to US CLO Notes in a low rate environment. See Fitch’s Lev Loan LIBOR Floors Help
US CLO Notes in Low Rate Environment commentary.
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Primary Market | Middle Market Loan Spreads
• The average spread on U.S. institutional first-lien loans in the BSL Average Spreads Jump in 2Q20
category increased to 533bps in 2Q, as per Refinitiv LPC, from a (U.S. Institutional First-Lien Loan Spreads)
Difference BSL
308bps average in 1Q20 and compared with 432bps in 1Q19. (bps) MM (Syndicated) MM (Including Club + Direct Lending)
700
• Spread data was not available from Refinitiv for the smaller 600
588
533
syndicated middle market (MM) institutional loans in 2Q20. 500
400
• LFI tracks primarily club and directly lending MM transactions. 300
Spreads for two of the 37 MM transactions it captured averaged 200
588bps. This compares with a 468bps average on 11 of 57 100
0
transactions logged in 1Q.
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
• Meanwhile, the average weighted average spread (WAS) difference
BSL – Broadly syndicated loan. MM – Middle market. Note: No second-quarter 2020 syndicated MM deals per
between MM CLO portfolios and BSL CLO portfolios under Fitch's Refinitiv. MM spread data shown from 2016 onward incudes club and direct lending deals, per LevFin Insights.
surveillance widened again in June compared with March 2020. Source: Refinitiv LPC, LevFin Insights, Fitch Ratings.
The spread was 177bps as of June 30, 2020, up from 170bps in
March 2020 and 163bps at YE 2019. MM and BSL CLOs WAS Differential Stable
• The average MM CLO WAS for managed transactions was 524bps (%)
Difference MM Average BSL Average
as of June 30, while the BSL CLO WAS averaged 347bps. 7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
10/15
12/15
10/16
12/16
10/17
12/17
10/18
12/18
10/19
12/19
8/15
2/16
4/16
6/16
8/16
2/17
4/17
6/17
8/17
2/18
4/18
6/18
8/18
2/19
4/19
6/19
8/19
2/20
4/20
6/20
MM – Middle market. BSL – Broadly syndicated loan. CLO – Collateralized loan obligation.
WAS – Weighted average spread.
Source: Fitch Ratings.
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Primary Market | Middle Market Leveraged Loan Issuance
• Middle market issuance in 2Q was less than half of 1Q volume and Middle Market Issuance Dropped Significantly in 2Q20
30% of the volume logged one-year earlier. (Annual Middle Market Institutional Leveraged Loan Issuance)
($ Bil.)
• There was $14 billion in MM issuance in 2Q20, down from 250
$30.8 billion in 1Q20 and $45.6 billion in 2Q20.
200
• Nearly all of the MM issuance was nonsponsored transactions. 204 202 144
150 183 180 183 182 180 183
168 170
• On the demand side, there were just two MM CLOs that priced in 153 150 142 139 4Q
2Q20, compared with four in 1Q20. Volume was $800 million in 100
106 107 3Q
101 45
91
2Q20 compared with $1.5 billion in notes and equity in 1Q20. 50 71 2Q
2Q
• Fitch is undertaking a review of MM CLOs, encompassing the 0
1Q 1Q
updating of the point-in-time Credit Opinions (COs) for private
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
borrowers for the loans held in these portfolios.
Source: Refinitiv LPC.
• As a result, the Ratings and COs of issuers will reflect the disruptions
to these borrowers caused by the coronavirus pandemic. Nonsponsored Loans Are 87% of Syndicated Middle Market Issuance
(Middle Market Nonsponsored Versus Sponsored Issuance)
• Consequently, the MM CLO notes will be evaluated to determine Nonsponsored Sponsored
whether rating changes are required at this time. (%)
100
• Fitch currently rates 127 MM CLO notes from 59 MM CLOs that 12 14
25 31 22 18
13
37 36 39 35 35 39 36 34 35 38
are managed by 17 different managers. See Fitch Reviewing U.S. MM 80 46 44 39 39
CLO Portfolios and Notes for more information. 60
89 86 87
40 75 69 78 82
63 64 61 65 65 61 64 66 65 62
54 56 62 61
20
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
1Q20
2Q20
Source: Refinitiv LPC.
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Primary Market | LBO Issuance Snapshot
• There were 18 LBO transactions in 2Q, to add to the 51 LBOs Low LBO Volume in 2020
completed in 1Q20. This compares with 45 and 66 LBOs undertaken (Broadly Syndicated and Middle Market LBO Issuance)
Middle Market (LHS)
in 1Q19 and 2Q19, respectively. BSL (LHS)
• LBO transactions in 2Q20 included Ziply Fiber, a company spun-off ($ Bil.) LBO as % of Total Leveraged Loan Issuance (RHS) (%)
245 35
from Frontier Communications Corporation’s Chapter 11 210 30
reorganization. A $790.5 million seven-year term loan was part of the 175 25
$1.352 billion sale. Xplornet Communications Inc. launched a 140 20
105 15
$932 million seven-year, first-lien term loan for its acquisition
70 10
by Stonepeak Partners LP. A deal reportedly valued at $2 billion. 35 5
Tech Data Corp. issued a $1.7 billion ABL term loan and a $370 million 0 0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
1H20
first-in, last-out term loan B backing its purchase by Apollo Global
Management , Inc. (A/Stable) for $5.4 billion. BSL – Broadly syndicated loan.
Source: Refinitiv LPC.
• The average leverage for BSL LBOs was stable at 6.5x in 2Q20. This is
down from the 6.7x average for 2019 transactions.
• There were no leverage stats for MM LBOs recorded by Refinitiv in MM LBO Leverage Declines
(MM and BSL LBO Deals Debt/EBITDA)
2Q20. Quarterly data, particularly for MM transactions, is somewhat MM BSL
(x)
volatile due to relatively small sample sizes. 8.0
7.1
6.7
LBO Count 7.0 6.3 6.2
6.6 6.4 6.5 6.5
5.9 6.0 6.1
(No. of LBOs) 5.5 5.7 5.5 5.6 5.6
6.0
375 5.0 4.8 6.2
304 6.0 6.1
269 5.0 5.5 5.7
300 245 5.3 5.4 5.3
219 223 205 206 231 230 5.3 5.1 5.1
225 192 186 178 205 4.0 4.6 4.6
149 145 4.5 4.3
150 4.0 3.8
69 3.0
53
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
1H20
75
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
1H20
MM – Middle market. BSL – Broadly syndicated loan. Note: First-half 2020 MM data is not available.
Source: Refinitiv LPC.
Source: Refinitiv LPC.
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Primary Market | BSL LBO Enterprise Valuation Multiples
• The average EV multiple on BSL transactions stayed at the high Large LBO First-Lien Leverage Eases as Volume Drops
level of 12.7x. (Average Broadly Syndicated LBO Debt and Equity Multiples)
• Although deal activity slowed in the first half of the year, the share First-Lien Debt/EBITDA Junior Debt/EBITDA Equity/EBITDA
(x)
of LBOs levered at greater than 6.0x continued to move higher, 12.7
14 12.1 12.7
reaching 80%. However, the share levered over 7.0x has remained 12 10.5 10.8 10.6
10.1 10.0 10.1 9.8
largely flat at around 40% since 2018. 10 9.1 9.5 9.6 9.2 9.1 9.1
8.0 5.4 6.2 6.3
7.3 7.9
• First-lien leverage ranged from 3.5x to 7.4x for the few 8 2.9
3.0
4.5 4.6 4.0 3.6 3.3 2.9
3.5 3.8 4.4 4.4 4.1
2.4
transactions tracked with the information available, per Refinitiv. 6 2.5 2.4 2.7 1.3 1.4 1.3 1.4
1.9 1.9 1.6 1.5 1.5
2.3 2.4 2.5 1.8 1.3 1.8 1.6 2.1
Equity contributions ranged from 23% to 61%. 4 2.0
2 4.4 3.6 3.6 3.8 4.0 3.8 4.3 4.7 4.4 4.6 4.9 5.2 5.3 5.2 5.1
• Notable deals included: 2.9 3.2 3.3 3.8
0
• Conservice LLC’s LBO of a portion of its business by Advent
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
1Q20
2Q20
International Corporation. The transaction was levered at 5.1x
Note: Based on average multiples by financing category.
through the first-lien and 7.2x total, according to LFI. Source: Refinitiv LPC.
• The LBO of Pathway Vet Alliance by TSG Consumer Partners.
Share of LBO Deals Levered Greater Than or Equal to 6.0x and 7.0x
Net first-lien and net total leverage are 4.5x and 6.1x
Leverage ≥ 6.0x Leverage ≥ 7.0x
respectively, according to LFI. (%)
90
80
70
60
50
40
30
20
10
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
1H20
Source: Refinitiv LPC.
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Primary Market | Documentation Weakening
• Most U.S. institutional leveraged loans were issued without Covenant-Lite Issuance Rises but Remains Below 2017 Levels
financial maintenance covenant reporting requirements. (Institutional Covenant-Lite Issuance)
Volume (LHS) % of Total Issuance (RHS)
• The trailing three month composite for Documentation Scores ($ Bil.) (%)
issued by Covenant Review, a Fitch group company, stood at 3.24 900 100
at the end of June, down from the 3.40 average in March. 750 80
This shows more conservatism in transaction documents that were 600
in the market in 2Q compared with 1Q. 60
450
• Collateral protection was the area of the most improvement based 40
300
on average score moves.
150 20
• Most documents were scored at the 3 level, including +/– modifiers in
the last three months, although some deals scored higher, and faced 0 0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
1H19
1H20
investor pushback. These included ThyssenKrupp Elevator, scoring 5+
on initial documents before pushback brought the level to 4- and Source: Refinitiv LPC.
Pathway Vet notching to 4+ from 4 at launch, according to LFI.
Covenant Review's Documentation Score
Composite Documentation Score Distribution (Three-Month Rolling Average)
Last Three Months Last 12 Months Composite Score Collateral Protection
(%) (Score) Default Protection Lenders' Repricing Optionality
25 2.4
More Protective
2.6
20
2.8
15 3.0
3.2
10
3.4
5 3.6 Less Protective
3.8
0
10/17
10/18
10/19
1/17
4/17
7/17
1/18
4/18
7/18
1/19
4/19
7/19
1/20
4/20
1 1- 2+ 2 2- 3+ 3 3- 4+ 4 4- 5+ 5
(Score)
Note: Data is through July 20, 2020. Only the most recent version of the loan agreement is considered. Source: Covenant Review.
Source: Covenant Review.
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Section 2
Loan Quality
Special Report May29,
July 4, 2020
2020 Fitchratings.com 14Corporates
Leveraged Finance
United States
Loan Quality | U.S. Leveraged Loan Market Size
U.S. Leveraged Loan Market Composition
• There was very little new leveraged loan issuance in 2Q20, Amount No.
particularly in April and May. As such, the universe grew only Industry ($ Bil.) (%) Issuers (% BSL) (% LMM)
Automotive 38.8 3 53 91 9
slightly, to $1.42 trillion at the end of 2Q, a growth rate of 2.9%.
The last time such slow growth was seen was in 2016. Banking & Finance 64.5 5 85 86 14
Broadcasting & Media 62.5 4 66 90 10
• Similar to 1Q20, the top three sectors: Technology, Services & Building & Materials 33.6 2 53 80 20
Miscellaneous, and Healthcare & Pharmaceutical, make up more Cable 29.8 2 13 99 1
than one-third of the total speculative-grade loans outstanding in Chemicals 57.5 4 84 89 11
2Q20. The remainder of the market is more fragmented. Consumer Products 34.1 2 49 87 13
• On a percentage basis, loans from the Utilities, Power & Gas sector, Energy 49.6 3 71 86 14
up $5 billion, and the Transportation sector, up $3 billion, increased Food, Beverage & Tobacco 33.7 2 54 81 19
the most since March. Meanwhile, loans from Metals & Mining, Gaming, Lodging & Restaurants 66.4 5 67 90 10
down $2 billion, and Retail, down $6 billion, declined the most. Healthcare & Pharmaceutical 155.1 11 183 91 9
Industrial/Manufacturing 49.3 3 83 86 14
Insurance 42.8 3 24 97 3
Leveraged Loan Universe Still Growing Despite Lower Volumes Leisure & Entertainment 47.7 3 47 95 5
(Market Size and Growth Rate)
Metals & Mining 9.2 1 19 84 16
Market Size (LHS) Growth Rate (RHS)
($ Bil.) (%) Paper & Containers 28.8 2 35 93 7
1,600 50 Real Estate 21.1 1 25 94 6
1,400 40
Retail 48.1 3 69 85 15
30
1,200
20 Services & Miscellaneous 169.3 12 270 83 17
1,000 10 Supermarkets & Drug Stores 11.5 1 14 85 15
800 0
Technology 197.4 14 207 93 7
600 (10)
(20) Telecommunications 73.6 5 55 97 3
400
(30) Transportation 56.9 4 69 87 13
200 (40)
Utilities, Power & Gas 37.8 3 49 89 11
0 (50)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 June Total 1,419.4 100 1,744 89 11
2020 BSL ‒ Broadly syndicated loan. LMM ‒ Large middle market. Note: Data as of June 30, 2020.
Note: Dotted line delineates positive and negative growth.
Source: Fitch U.S. Leveraged Loan Default Index, Refinitiv LPC, Bloomberg. Source: Fitch U.S. Leveraged Loan Default Index, Refinitiv LPC, Bloomberg LP.
Special Report May29,
July 4, 2020
2020 Fitchratings.com 15Corporates
Leveraged Finance
United States
Loan Quality | Leveraged Loan Market at a Glance
• First-lien institutional loans rated ‘BB–’ and better declined Current Rating Distribution of First-Lien Institutional Loans
incrementally and make up 28% of the total as of 2Q20, down from
> BBB–
30% as of 1Q20 and 34% as of 1Q19. ≤ CCC+
4.5% BB+
10.4% 7.1%
• Meanwhile, the segment of loans rated ‘CCC+’ and below grew by
BB
the largest amount, to 10.4% of the index from 4.7% at YE 2019. B– 7.6%
Loans rated ‘B–’ also saw growth of 17.8% from 15.1.%. 17.8%
BB–
• Some loans that moved to the ‘B–’ rating category from higher levels 9.3%
included Fitch’s downgrade of Navistar International Corporation to
‘B–’ with a Negative Outlook from ‘B’ with a Stable Outlook, and
B+
Project Boost Purchaser, LLC and Zinc-Polymer Parent Holdings, B 16.7%
LLC to ‘B–’ from ‘B’ with a Stable Outlook. 26.6%
Note: The breakdown is based on issue ratings by at least one of the agencies.
Source: Fitch Ratings.
Historical Rating Distribution of First-Lien Institutional Loans
(%) > BBB– BB+ BB BB– B+ B B– ≤ CCC+
100 4.0 4.3 3.7 4.1 4.1 4.8 4.7
6.9 5.9 5.9 6.6 10.4
8.5 8.8 8.8 10.9 11.1 12.1 12.5 13.3 14.8 15.1 17.6
80 17.8
25.5 27.0 27.0 30.0 30.7 31.0 31.1 31.2 31.1 31.3
60 29.7 26.6
20.2 20.9 20.9 17.5 18.8 18.0 18.1 17.8
40 17.6 17.6 16.2 16.7
16.3 15.5 15.5 14.9 13.1 13.0 11.5 11.1 10.3 10.0 10.9 9.3
20 11.0 9.6 9.5 9.7 10.9
11.8 11.8 10.5 10.8 10.5 8.6 7.6
7.8 7.1 7.1 8.0 7.4 6.6 5.5 5.9 5.8 6.1 7.2 7.1
0 3.9 2.9 2.9 5.1 5.2 6.0 6.3 5.9 4.9 4.7 3.4 4.5
12/16 6/17 12/17 6/18 9/18 12/18 3/19 6/19 9/19 12/19 3/20 6/20
Note: The breakdown is based on issue ratings by at least one of the agencies.
Source: Fitch Ratings.
Special Report May29,
July 4, 2020
2020 Fitchratings.com 16Corporates
Leveraged Finance
United States
Loan Quality | Loan Rating Comparison by Sector
• Negative rating actions were taken in response to financial Rating Distribution of First-Lien Loans by Industry
pressures felt by corporations stemming from the coronavirus
spread-slowing measures. Almost all sectors had companies % of Sector Rated BB % of Sector Rated B
% of Sector Rated
CCC–C
with ratings that shifted down, with Food, Beverage & Tobacco Automotivea 25 65 10
and Automotive having the most issuers dropping from the Banking & Finance 46 52 2
‘BB’ category to ‘B’, and Leisure & Entertainment and Metals & Broadcasting & Media 39 52 8
Mining having the most issuers dropping from ‘B’ to ‘CCC’ to ‘C’. Building & Materials 26 72 2
Cable 73 27 0
• Most industries saw a higher proportion of loans fall into the Chemical 29 57 14
‘CCC+’ to ‘C’ category compared with last quarter, with the Consumer Products 19 68 13
Energy 24 57 19
overall average moving to 10% from 7%.
Food, Beverage & Tobacco 17 76 7
• Industries with the highest share of loans in the ‘CCC+’ to ‘C’ Gaming, Lodging & Restaurants 41 52 8
category as of June were Leisure & Entertainment at 42%, up Healthcare & Pharmaceutical 22 66 12
Industrial & Manufacturing 22 57 21
from 10% in March; Metals & Mining at 39%, up from 26%; and
Insurance 0 99 1
Retail at 32%, up from 28%. Leisure & Entertainment 20 39 42
• The Retail sector only contributes about 3% to total index Metals & Mining 18 43 39
Paper & Containers 41 57 1
outstandings. Total outstanding loans in the sector dropped Real Estate 76 11 13
12% from last quarter due to defaults and low new issuance. Retail 14 54 32
Similarly, Metals & Mining makes up about 1% of the market, Services & Miscellaneous 21 72 7
and saw outstandings drop more than 20%. Supermarkets & Drug Stores 35 65 0
Technology 23 72 5
• Meanwhile, the amount of loans from Transportation and Telecommunication 32 62 6
Utilities, Power & Gas increased due to issuers’ urgent liquidity Transportation 29 61 10
needs. Utilities, Power & Gas 60 36 4
Totala 28 61 10
aIssues rated ‘BBB’ are included in the percentage of the sector rated ‘BB’. Issues with +/– rating modifiers
are included within each rating category.
Source: Fitch U.S. Leveraged Loan Default Index, Refinitiv LPC, Bloomberg LP.
Special Report May29,
July 4, 2020
2020 Fitchratings.com 17Corporates
Leveraged Finance
United States
Loan Quality | Maturity Wall
• The loan universe maturities are primarily back loaded with 57% of Institutional Leveraged Loan Maturities by Year
the total index maturing in 2025 or beyond. ($ Bil.)
June 2019 June 2020
• Refinancing activity is lower than in the past, resulting in more 450
388 394
volume moving closer to maturity. About 58% of market volume 400 356
comes due within five years, compared with 48% one-year earlier. 350 312
282
300
• There is a higher proportion of ‘CCC+’ and below loans in the earlier 250 229
maturing buckets, reflecting more default risk for issuers with near- 200
149 154
term debt, and possibly cash flow issues and/or limited ability to 150 122
137
access capital markets. 100 75 86
37 44
50 13 8
9 0
0
2019 2020 2021 2022 2023 2024 2025 2026 ≥ 2027
Source: Fitch U.S. Leveraged Loan Default Index, Refinitiv LPC, Bloomberg.
Institutional First-Lien Leveraged Loan Maturities by Rating Category Institutional Leveraged Loan Maturities by Years Out
≥ BB B ≤ CCC December 2007 June 2019 June 2020
(%)
(% of Total Outstanding)
100 4.9 2.5
8.7 10.5 35
23.5 17.3 31
29
80 30 27 26
52.1 46.9 45.8 24
59.7 25 22 21
60 58.9
70.5 18
0.0 67.4 20 17 16
63.0
40
15
47.9 41.6 10 11
51.6 7
20 10 6
30.6 35.4 5 6
20.8 3 4 4 4
11.4 13.5 15.3 5 1 2 2 2
0
2020 2021 2022 2023 2024 2025 2026 ≥ 2027 0
0–1 1–2 2–3 3–4 4–5 5–6 6–7 7+
Note: Excludes loans with no rating approximately 11% of the total universe. Rating categories include +/– modifiers. (Years to Maturity)
Source: Fitch U.S. Leveraged Loan Default Index, Refinitiv LPC, Bloomberg. Source: Fitch U.S. Leveraged Loan Default Index, Refinitiv LPC, Bloomberg.
Special Report May29,
July 4, 2020
2020 Fitchratings.com 18Corporates
Leveraged Finance
United States
Loan Quality | Fitch Portfolio at a Glance
• Fitch’s speculative-grade coverage includes loan and high-yield Fitch Portfolio by Sector: Top-10 by Issuer Count
(%)
bond issuers assigned public or private rating Issuer Default 18
20 15
Ratings (IDRs) and point-in-time COs. 16
15
12 10 9
• Of the approximately 900 companies with Fitch IDRs and COs, the 8
7 7 6 5 5 4
largest sectors covered are Technology, Energy and Healthcare. 4
0
• The highest proportion of issuers in the speculative-grade portfolio
Chemical
Building & Materials
Technology
Energy
Pharmaceutical
Broadcasting & Media
Gaming, Lodging &
Other
Industrial & Manufacturing
Services & Miscellaneous
Food, Beverage & Tobacco
Healthcare &
Restaurants
are in the ‘B’ and ‘B–’ categories, combining IDRs and COs.
• Issuers in the ‘CCC’ or ‘ccc*’ category or lower now make up 20% of
the portfolio, compared with 12% as of YE 2019. This figure could
continue to grow as nearly 9% of issuers are currently rated ‘B–’ or
‘b–*’ with a Rating Watch Negative or Negative Outlook assigned.
Note: As of June 30, 2020. Includes defaulted issuers.
Source: Fitch Ratings.
Fitch Portfolio by Quality
12/31/2019 3/31/2020 6/30/2020
(%)
8.6% of portfolio
30 28 27 at B–/b–* with a
24 24 24 Negative
25 22 Outlook/Watch.
20
Note: Credit Opinions (COs) are denoted with a lower-case letter(s) and an asterisk (*). 15
COs are provided primarily for the purposes of their inclusion in CLO transactions rated 15
10 10 10 10 10 9 10 9 10 10
by Fitch. COs are not ratings. COs use a published rating scale, but either omit certain 9
10 7
analytical characteristics of a rating, or match them to a lower standard than in a credit 6 6 5
rating. The limitations compared to a rating could include: “point-in-time” coverage, 5 2 3
limited information availability and review, an abbreviated review process in certain
0
cases, and reduced robustness of Outlooks and Watch status. These limitations are BB+/bb+* BB/bb* BB–/bb–* B+/b+* B/b* B–/b–* CCC/ccc* CC/cc* and
consistent with the terms of their application within a pooled asset context, and are Below a
clearly signaled in the notation used to identify COs. For more information, please aIncludes defaulted issuers.
consult our Credit Policy report on Credit Opinions. Source: Fitch Ratings.
Special Report May29,
July 4, 2020
2020 Fitchratings.com 19Corporates
Leveraged Finance
United States
Loan Quality | Fitch Global Rating Actions by Sector Coronavirus-Driven Rating Actions on Select Corporates
Negative Outlook or Single-Notch Multi-Notch
Negative Watch Downgrades Downgrades
• Fitch prioritized rating reviews for companies based on rating By Sector
Aerospace & Defense 9 3 1
headroom and expected sector impact. Highly affected sectors Auto & Related 21 10 3
include Oil & Gas; Metals & Mining; Auto; Transportation; Building Materials & Construction 16 3 4
Nonfood Retail; and Lodging & Leisure. Capital Goods 2 4 1
Chemicals 14 5 1
• The pace of coronavirus-related negative actions for Fitch’s Consumer 5 5 2
Diversified Manufacturing 16 7 0
corporate coverage slowed. Reviews look set to settle into a Diversified Services 7 3 2
more normalized pattern but Outlooks suggest more Electric-Corporate 20 5 0
downgrades will come. Energy (Oil & Gas) 60 18 19
Environmental Services 1 0 0
• Activity can be tracked by our Coronavirus Exposure and Rating Food, Beverage & Tobacco 17 4 0
Gaming, Lodging & Leisure 26 14 4
Action Tracker. Most speculative-grade issuers reviewedby Fitch Health Care 6 1 0
had ratings placed on Negative Outlook or Negative Watch. Homebuilding 2 4 2
Media & Entertainment 14 4 3
• As mentioned in Fitch’s The Road Back: Post-Lockdown Natural Gas & Propane 2 1 0
Assumptions for Global Corporates, we estimated there will be a Natural Resources 23 9 5
Property/Real Estate 16 4 2
revenue loss of $8.5 trillion by 2022 from the corporates that Real Estate Investment Trusts 12 3 1
we rate, when comparing current estimates to our economic Retailing 13 10 8
growth forecasts from December 2019. This is on an estimated Technology 12 3 1
Telecommunications 10 6 0
annual revenue base of more than $26 trillion. Transportation 27 15 7
Utilities - Non U.S. 9 2 1
Water/Wastewater Utility 5 2 0
By Grade
Speculative Grade 211 100 55
Investment Grade 155 45 12
By Region
APAC 51 18 8
EMEA 85 45 16
Latin America 70 22 16
North America 160 60 27
Note: “By Grade” refers to the rating level prior to March 9, 2020. Rating actions limited to a portfolio of 1,414 public ratings
included in the series of Screener reports published from March 2020 until early April 2020. The Outlook or Negative Watch
column includes all actions that resulted in a Negative Outlook or Negative Watch, irrespective of action type or previous
Outlook. Data is as of July 17, 2020.
Source: Fitch Ratings.
Special Report May29,
July 4, 2020
2020 Fitchratings.com 20Corporates
Leveraged Finance
United States
Loan Quality | Select Fitch Rating Actions by Sector and by Week
Percentage of the Sector Subjected to Coronavirus-Related Downgrades or Weekly Breakdown of Fitch Rating Actions
Other Negative Rating Actions Outlook Revision
Rating Watch On
(%)
0 20 40 60 80
Downgrade
Downgrade and Outlook/Watch Revision
Gaming, Lodging & Leisure 75.9 (Number of Actions)
Transportation 66 400
Auto & Related 50
357
Aerospace & Defense 50
350
Retailing 45.5
Building Materials & Construction 40.7
Media & Entertainment 38.5 300
Consumer 37.5
Diversified Manufacturing 36.8
250 235
Environmental Services 28.6
Energy (Oil & Gas) 25.5
191
Chemicals 25.4 200 183
Natural Resources 24.6
Capital Goods 23.1 150 133
Property/Real Estate 21.9 124
Technology 105
16.4
Diversified Services 13.5
100 82
66
Food, Beverage & Tobacco 8.9
44 38
Homebuilding 4.2 50 29 25 30 28
Telecommunications 3.2 14 11
5 9
Electric-Corporate 2.8 0
0
Health Care 2.7
3/13/20
3/20/20
3/27/20
4/10/20
4/17/20
4/24/20
5/15/20
5/22/20
5/29/20
6/12/20
6/19/20
6/26/20
7/10/20
7/17/20
3/6/20
4/3/20
5/1/20
5/8/20
6/5/20
7/3/20
Utilities - Non US 1.8
Note: Date as of July 17, 2020. Note: Data as of July 17, 2020. Includes Corporate, Sovereign, Financial Institutions and Public Finance issuers.
Source: Fitch Ratings. Source: Fitch Ratings.
Special Report May29,
July 4, 2020
2020 Fitchratings.com 21Corporates
Leveraged Finance
United States
Loan Quality | Rating Actions on Obligors with Loans in CLOs
Fitch CLO IDR-Equivalent Rating Changes
Down Up Net
(No. Issuer Ratings)
40
20
0
(20)
(40)
(60)
(80)
(100)
(120)
(140)
(160)
wk 1 wk 2 wk 3 wk 4 wk 1 wk 2 wk 3 wk 4 wk 1 wk 2 wk 3 wk 4 wk 1 wk 2 wk 3 wk 4 wk 1 wk 2
March April May June July
IDR – Issuer Default Rating. CLO – Collateralized loan obligation. Note: Data through July 14, 2020 and out of approximately 1,500 issuers in Fitch-rated broadly syndicated loan CLOs under Fitch's surveillance at each point in
time. See CLO and Corporate Rating Criteria for IDR-equivalent methodology. Non-rated credits, rating changes due to expirations or withdrawals excluded. Weeks break at day 7, 15, 22 and 31.
Source: Fitch Ratings
• Rating actions on issuers of loans held in U.S. BSL CLOs under Fitch’s surveillance were heaviest at the end of March and during April.
Since May, the level of positive or negative actions on obligors with loans in CLO portfolios normalized, although actions were net
negative through mid-June.
• The top industry classifications for downgraded exposure in CLOs were Business Services, Gaming, Leisure & Entertainment, and Retail.
• The downgrade activity on leveraged loan issuers pressured CLO portfolio credit quality metrics. The Fitch weighted average rating factor
(WARF) weakened (increased) to 36.4 on average at the end of June for BSL CLOs under Fitch’s surveillance, from 34.5 in March 2020 and
the 33.6 average logged in December 2019. Exposure to ‘CCC+’ rated and defaulted issuers is also up. Fitch’s rating factor scale ranges
from 0 to 100 and equates to the 10-year asset default rate used in Fitch’s Portfolio Credit Model. The ‘B’ level WARF is 32.2, while for
‘B–’ it is 40.6. See our Monthly U.S. CLO Index – June 2020 for more information.
• The ratings referenced are Fitch IDR equivalent ratings used for CLO surveillance. The Fitch IDR equivalent ratings methodology can be
found in Fitch’s CLOs and Corporate CDOs Rating Criteria.
• Negative rating actions include downgrades and assignments of Rating Watch Negative.
Special Report May29,
July 4, 2020
2020 Fitchratings.com 22Corporates
Leveraged Finance
United States
Loan Quality | Fitch Model-Based Middle Market Monitor
• Fitch’s privately covered portfolio of issuers targeted by MM Portfolio Weighting by Sector
CLOs is generally composed of smaller issuers, although there is a Business Services 22
small number of BSL issuers included. The average EBITDA for Healthcare 19
issuers in the portfolio is $30 million. Industrial & Manufacturing 9
Computers & Electronics 9
• Fitch’s portfolio remains heavily allocated in Business Services Consumer Products 8
and Healthcare, at 22% and 19% of the portfolio, respectively. Food, Beverage & Tobacco 4
Retail 3
• About 68%, up from 64% in 1Q20, of the portfolio is evaluated at Transportation & Distribution 3
a ‘b–*’ or lower CO, which reflects not only the weighting toward Automobiles 3
sponsored transactions with characteristically higher leverage, Gaming, Leisure & Entertainment 3
but also the smaller scale and higher revenue concentration Other 17
typical of issuers in the segment. These factors all lower an 0 5 10 15 20 25
(%)
issuer’s ability to withstand economic downturns. Source: Fitch Ratings.
Portfolio Statistics
(TTM as of June 30, 2020) Revenue EBITDA
Total Portfolio Size: 720
Average ($ Mil.) 184 30
Median ($ Mil.) 117 22 Median Leverage and Coverage Portfolio Weighting
Debt/EBITDA (x) EBITDA/Interest (x) Leverage (LHS) Coverage (LHS) by Rating
Credit Metrics (Average) Portfolio Size (RHS)
b+* 3.0 4.2 (x) (No. Issuers)
b+* 4
b* 5.0 2.7 6.0 1,000
b–* 5.2 2.4 900
5.0
ccc* 9.7 1.2 800
b* 29
Total Portfolio 5.3 2.4 4.0 700
600
3.0 500
Debt/ EBITDA/ Total Debt b–* 52
400
Sectors in Focus (Average) EBITDA (x) Interest (x) ($ Mil.) 2.0 300
Business Services 5.2 2.4 113 200
Healthcare 5.3 2.4 105 1.0 ccc+* and
100 16
Below
Computer & Electronics 6.3 2.1 165 0.0 0
Industrial & Manufacturing 5.3 2.4 115
12/18
12/19
9/18
3/19
6/19
9/19
3/20
6/20
0 20 40 60
Consumer Products 5.3 2.6 103 (%)
Source: Fitch Ratings. Source: Fitch Ratings. Source: Fitch Ratings.
Special Report May29,
July 4, 2020
2020 Fitchratings.com 23Corporates
Leveraged Finance
United States
Section 3
Recovery and Default Outlook
Special Report May29,
July 4, 2020
2020 Fitchratings.com 24Corporates
Leveraged Finance
United States
Defaults | Fitch Default Tracking
• The default rate for issuers with loans held in U.S. CLOs is not nearly as high as the institutional leveraged loan default rate, but both default rates
have significantly increased in 2Q20. The leveraged loan default rate was 3.9% as of 2Q20, while the CLO default rate was 1.2%.
• The CLO default rate will continue to be below the institutional leveraged loan headline number, primarily due to a few factors, including CLO
diversification requirements, active management of CLOs and calculation differences. The institutional leveraged loan default rate is TTM, while
the CLO default rate is the exposure to Fitch-identified defaulted issuers at the point in time.
• The most widely held defaulted issuers as of June 30 by CLO count were:
• Covia Holdings Corp. classified as Metals & Mining, held by 37% of the BSL CLOs under Fitch’s surveillance in June.
• Serta Simmons Bedding LLC, Retail, in 21% of CLOs.
• CDS U.S. Intermediate Holding, Inc., Broadcasting & Media, in 20% of CLOs.
• 24 Hour Fitness Worldwide, Inc., in Gaming, Leisure & Entertainment in 18% of CLOs.
Fitch-Rated CLO Index Default Rate
Institutional Loan Default Rate Fitch-Rated BSL CLO Index Default Rate
(%)
4.2
3.9
3.6
3.3
3.0
2.7
2.4
2.1
1.8
1.5
1.2
0.9
0.6
0.3
0.0
6/19 7/19 8/19 9/19 10/19 11/19 12/19 1/20 2/20 3/20 4/20 5/20 6/20
BSL – Broadly syndicated loan. CLO – Collateralized loan obligation. Note: The institutional loan default rate is based on TTM default volume, whereas the CLO default rate represents the cure exposure to Fitch-identified
defaulted issuers at each point in time.
Source: Fitch U.S. Leveraged Loan Default Index.
Special Report May29,
July 4, 2020
2020 Fitchratings.com 25Corporates
Leveraged Finance
United States
Defaults | Default Rate Forecast through 2021
• In March, Fitch raised its 2020 institutional term loan default rate
U.S. Institutional Leveraged Loan Default Rate
forecast to 5%–6% from 3%, and our 2021 institutional loan default rate
to 8%–9%, as many issuers succumbed to drastically lower revenue. 2020F 2021F
6/20 Severe Severe
See our Cumulative 20/21 US Loan, HY Default Rates Near 15% on 2018 2019 TTM 2020F Case 2021F Case
Coronavirus for more information.
(%) 1.8 1.8 3.9 5.0–6.0 7.0+ 8.0–9.0 10.0+
• The July TTM institutional term loan default rate topped 4% for the F – Forecast.
first time since May 2010, with $5.1 billion of volume so far this Source: Fitch Ratings.
month. YTD defaults tally $48.7 billion and are tracking toward Fitch’s
projected $80 billion by year end, corresponding to the 5%–6% rate. U.S. Institutional Leveraged Loan Default Ratesa
• The volume of expected defaults during the coronavirus pandemic Current Forecast Severe Forecast
is higher than the global financial crisis of 2008–2009. This is due to (%)
leveraged loans making up a higher portion of today’s speculative-grade 12
debt market, supported by years of strong demand for investment-grade 10
CLO notes.
8
• As noted in our What Investors Want to Know: Coronavirus Impact on U.S.
6
Speculative-Grade Market, sponsored transactions make up a large
portion of this market, and these sponsored issuers are more highly 4
levered on a senior secured basis than a decade ago. Documentation is 2
more flexible. Backward-looking conclusions as to expected RRs going
0
into the current recession may not be relevant. 2007 2009 2011 2013 2015 2017 2019 2020F
• The coronavirus caused procedural difficulties that may result in a aCalculated based on loan default volume, not number of defaults. F – Forecast.
Source: Fitch Ratings
degree of value erosion from the pandemic. See our Coronavirus Takes
Aim at Valuations in Bankruptcy and Coronavirus Economy Disrupts
Bankruptcy Process.
Special Report May29,
July 4, 2020
2020 Fitchratings.com 26Corporates
Leveraged Finance
United States
Defaults | Sector Default Rates
U.S. Institutional Leveraged Loan Default Rates: Select Years
Financial Crisis
(%) 2008 2009 2015 2016 2017 2018 2019 TTM June 2007–2019
Automotive 2.7 19.3 — 2.4 2.3 2.6 1.3 4.2 2.6
Banking & Finance — 33.4 — 1.5 3.5 — 1.5 0.3 3.1
Broadcasting & Media 8.8 19.5 0.5 5.4 3.4 14.7 3.5 5.0 7.0
Building & Materials 13.8 31.2 — — — — 0.7 0.6 3.5
Cable — 28.1 — — — — — — 2.9
Chemicals 3.7 44.2 — 1.3 — 0.5 — — 4.3
Consumer Products 0.9 8.1 3.5 2.7 — — 0.7 5.7 1.6
Energy 1.7 2.6 9.8 14.2 17.5 11.2 5.5 12.9 5.7
Food, Beverage & Tobacco 1.2 0.8 — — — 0.4 1.7 0.8 0.4
Gaming, Lodging & Restaurants 13.4 2.5 13.0 — 0.3 — — 2.8 3.1
Healthcare & Pharmaceutical 0.3 1.0 2.3 — 1.6 0.6 1.2 2.3 0.8
Industrial/Manufacturing — 4.0 — — 1.9 — 0.5 8.2 0.6
Insurance — — — — — — — — —
Leisure & Entertainment — 32.8 — 0.1 0.7 — 1.9 6.5 2.5
Metals & Mining — 4.1 12.9 23.6 — 14.2 19.1 35.4 5.8
Paper & Containers 1.9 11.8 — 5.3 1.0 — — — 2.9
Real Estate 19.8 21.1 — — — — — — 3.7
Retail 1.1 5.7 0.5 0.4 8.2 4.7 7.0 15.1 3.3
Services & Miscellaneous 1.2 0.6 0.6 0.5 0.3 0.8 1.2 3.3 0.9
Supermarkets & Drug Stores — 4.2 — 2.2 — 1.1 — 7.0 0.5
Technology — 1.9 0.1 0.4 0.3 0.0 0.4 0.4 0.3
Telecommunications 2.0 5.2 — — 5.3 — 4.0 7.8 1.8
Transportation 4.6 1.2 — — 0.9 1.6 1.9 3.6 1.6
Utilities, Power & Gas — — — 1.5 2.9 1.2 0.9 0.7 5.8
Total Index 2.9 10.5 1.7 1.8 2.4 1.8 1.8 3.9 2.5
Note: The shading represents default rates relative to the 1.8% non-recessionary market average.
Source: Fitch U.S. Leveraged Loan Default Index, Refinitiv LPC, Bloomberg.
Special Report May29,
July 4, 2020
2020 Fitchratings.com 27Corporates
Leveraged Finance
United States
Loan Quality | Fitch Recovery Analysis Trends
• Fitch’s instrument ratings for issuers rated ‘B+’ and lower include Recovery Rating Distribution: First-Lien Debt
instrument Recovery Ratings (RR) and Recovery Credit Opinions (rr*), 2019 2018 2017 2016 2015
based on issuer-specific EV. Details on assumption and outcome (% of Issues)
trends are published in the periodic U.S. Leveraged Finance: Corporate 70 63
59
Recovery Rating Trends report. 60 53
49
• The median EV multiple used in analyses with going-concern (GC) 50
40 34
outcomes during the period (January 2019–February 2020) covered 30 28
26
29
30
in the report declined to 5.5x from 6.0x in the 2019 and 2018 editions. 21 21 19
20 14 14
This is also lower than the 6.1x cross-sector median exit multiple from 10
6 4 4 6 5
10 1 1 1 1 0
Fitch’s bankruptcy case study database. The reduction is mainly due 0 0 1 1 0
0
to the addition of many small issuers to the portfolio that were RR1 RR2 RR3 RR4 RR5 RR6
assigned lower multiples. RR – Recovery Rating. Note: U.S. corporate public and private Issuer Default Ratings and Issuer Default
Credit Opinions of B+/b+* and lower only.
• The GC post-restructuring EBITDA assumption was 26% lower than Source: Fitch Ratings.
the LTM EBITDA on average and 20% lower at the median. For ‘CCC’
First-Lien Debt Rated RR1/rr1* by Sector
category issuers, the median decline is 15%. (Issuers Rated B+/b+* or Lower)
• Higher issuer first-lien leverage contributed to a continuing drop in Diversified Services
Consumer
the share of first-lien issues, such as revolvers, loans, secured bonds Diversified Manufacturing
Technology
Natural Resources
and others that were assigned an ‘RR1’ in 2019. Median first-lien Auto & Related
Food, Beverage & Tobacco
leverage rose to 5.4x in this year’s edition, from 4.8x in the prior Building Materials & Construction
Homebuilding
report. Many smaller, sponsored issuers were added to the portfolio, Gaming, Lodging & Leisure
Chemicals
which pulls the median upward. Healthcare & Pharmaceuticals
Transportation
Retailing
• The coronavirus pandemic has further pressured first-lien issue RRs Media & Entertainment
Aerospace & Defense
and tool assumptions YTD. GC EBITDA assumptions for some Telecommunications
Energy (Oil & Gas)
companies were more draconian than in the pre-crisis era. All
0 20
40 60 80
• For Fitch’s privately-rated MM issuers, most RRs remained constant (% of Issues)
despite rating actions taken between March 17 to June 4. See our RR – Recovery Rating. Note: U.S. corporate public and private Issuer Default Ratings and Issuer Default
Credit Opinions of B+/b+* and lower only.
U.S. Middle-Market Recovery Ratings and the Coronavirus report. Source: Fitch Ratings.
Special Report May29,
July 4, 2020
2020 Fitchratings.com 28Corporates
Leveraged Finance
United States
Defaults | Revolver Performance in Bankruptcy
• Fitch’s analysis of cases with available data finds that median Revolver Recovery Rate Distribution
bankruptcy date utilization rates for cash flow facilities and for ABL Cash Flow
(%)
ABLs is 91% and 79%.
100 93
• This supports Fitch’s analytical approach that generally assumes 90
80
full draws on cash flow revolvers and variable ABL utilization when 70 61
performing recovery analyzes. 60
50
• Revolvers exhibit strong recoveries in default. ABL recoveries 40
30
averaged 97%, while cash flow revolvers averaged 83%. 20 11 13
10
Ninety-three percent of ABL facilities and 58% of cash flow 10 1 1 0 4 2 3 2
revolvers received full recovery. 0
0–10 11–30 31–50 51–70 71–90 91–100
• The median utilization rate for retail ABLs was 69%. Structural (RR6) (RR5) (RR4) (RR3) (RR2) (RR1)
features can limit borrowings, including springing borrowing ABL – Asset-backed loan. Note: ABL sample size = 133, Cash Flow sample size = 166.
restrictions if fixed-charge coverage ratios fall below minimum Source: Fitch Ratings, company disclosure statements.
thresholds and borrowing base re-determinations. Form of Lender Distribution for Claims
• All 34 retail ABLs in our sample received a full recovery. Since the Form Number of Revolvers
start of the coronavirus, ABLs have become a more popular All Cash (Includes DIP Rollups) 198
Cash, New Equity 6
financing option for performing retailers, given cloudy future cash
Cash, Secured Notes 22
flow visibility, deteriorating credit quality, increasing external Cash, Secured Notes, New Equity 11
funding needs and the strong recovery histories of these facilities. Cash, Unsecured Notes, New Equity 1
Cash, Unsecured Notes, New Equity, Options/Warrants 1
• Distributions for revolver claims were paid exclusively in cash in New Equity 16
65% of cases, with the remainder a combination of cash, new notes Secured Notes 22
and common equity. Secured Notes, New Equity 18
Secured Notes, Unsecured Notes, New Equity 4
• For more information see: Revolving Credit Facility Performance in Reinstated 1
Bankruptcy. N.A. ($0 Outstanding at Default) 3
Total Number of Revolvers 303
DIP – Debtor-in-possession. N.A. – Not applicable.
Source: Fitch Ratings, company disclosure statements.
Special Report May29,
July 4, 2020
2020 Fitchratings.com 29Corporates
Leveraged Finance
United States
Defaults | Loans of Concern
• Fitch’s Top Loans of Concern total outstanding declined by 31% from its Loans of Concern as a Percent of Market
April peak, to $47.6 billion. The decline is due to recent defaults, Top Loans of Concern (LHS) Tier 2 Loans of Concern (LHS) Percent of Market (RHS)
partially offset by some additions in the past couple of months. ($ Bil.) (%)
Fitch’s Top Loans of Concern and Tier 2 Loans of Concern lists combined 300 20
258.5 257.1 256.7
total stands at $247.8 billion and makes up 17% of the index. 233.6
247.8 18
250
16
• Of the companies on the Top Loans of Concern, 22% have term loans 14
200
maturing by YE 2021, with many facing revolver maturities before this 12
time. This compares with 4% of the overall market in this time frame. 150 10
94.1 103.3 106.8 110.1 109.6 106.6 102.1
8
• Defaults in 2Q produced $32.2 billion, nearly threefold the $11.4 billion 100
6
in 1Q20. Retail, Telecom and Energy collectively accounted for 55% of 4
50
the volume. There were 42 defaults, double the total in 1Q. 2
April included a record 19 defaults, surpassing the previous monthly 0 0
high of 15 back in April 2009. 8/19 9/19 10/19 11/19 12/19 1/20 2/20 3/20 4/20 5/20 6/20 7/20
Source: Fitch U.S. Leveraged Loan Default Index.
• Recent energy defaults include Fieldwood Energy LLC, Chesapeake
Energy Corp., Ultra Resources Inc. and California Resources Corp. The Loans of Concern Maturity Walls Versus Market
TTM energy default rate was above 15%, and could finish the year at All Institutional Loans Top Loans of Concern
(%)
18%, with Seadrill Partners LLC likely adding sizable volume.
35
• Retail defaults are heading to 17%, following Ascena Retail Group 29.6
30 27.8 26.6
Inc.’s bankruptcy filing.
25
• Sizable 2Q defaults included Neiman Marcus Group Inc., JC Penney 22.1
Corp. Inc., J Crew Group Inc., Serta Simmons Bedding LLC and General 20 16.6
15.4
Nutrition Centers Inc. 15 12.9
11.5 10.5 11.1
• See Fitch U.S. Leveraged Loan Default Insight for details. 10
5.8 6.1
5 3.1
0.9
0
2020 2021 2022 2023 2024 2025 ≥2026
Source: Fitch U.S. Leveraged Loan Default Index, Refinitiv LPC, Bloomberg.
Special Report May29,
July 4, 2020
2020 Fitchratings.com 30You can also read
