One area to watch as the Federal Reserve maneuvers a soft landing from inflation will be the credit health of leveraged borrowers in the face of prolonged economic pain caused by tightening monetary policy. August saw an uptick in loan defaults, with a total of USD 6bn in default volume across six borrowers - the highest monthly total since October 2020. Endo International’s USD 1.975bn Chapter 11 filing was the largest of the month, followed by Lumileds’ USD 1.67bn filing. This pushed the trailing 12-month average default rate up to 1.3% in August from 0.9% in July. Notably, year-to-date (YTD) default volume through August, at USD 17.6bn, is more than triple the total this time last year.
Thus far in September, Cineworld has logged the largest leveraged loan default since iHeartCommunications filed in 2018. The cinema operator sought Chapter 11 protection in Texas earlier this month, pushing the TTM loan default rate up further to 1.5%.
The high-yield (HY) bond default rate also moved up in August, to 0.9% from 0.8% in July, following Endo International’s Chapter 11 filing and The Geo Group’s distressed exchange. Fitch projects the rate continuing to move upward, likely ending the year around 1% and potentially exceeding 2% by 2024, as likely restructuring candidates such as Bed Bath & Beyond and Avaya work through their options.
While the two default rates have slowly been creeping upward, they remain below the historical non-recessionary averages of 1.7% in the loan market and 2.2% in the bond market, indicating that at least for now, credit health remains under control.
Ill health: recent defaults concentrated in healthcare sector, more restructurings expected
The majority of August default volume (USD 5.1bn) came from the healthcare and pharmaceuticals sector, which has seen the highest default volume (USD 7.2bn) over the past 12 months, followed by broadcasting and media (USD 6.2bn) and utilities, power and gas (USD 3.7bn).
Some defaults, such as Envision Healthcare’s distressed exchange, can be attributed to liquidity issues, while others, such as the prominent Endo filing, are more event-driven. The pharmaceutical giant, widely blamed for inflaming the opioid epidemic, missed interest payments on its 5.375% and 6% unsecured notes due 2023, sparking long-expected restructuring talks amid thousands of ongoing lawsuits.
Looking ahead, Fitch anticipates limited new loan default volume in the healthcare space, with borrowers such as Jordan Healthcare Services likely to restructure over the next few months. On the bond side, companies including Bausch Health and Community Health Systems are considered at risk.
Jordan Healthcare Services’ TLB due 2025 was recently bid at 62.3, trading at a significant discount to its 98.5 issue price. Loans for Rodan & Fields (47.56 average bid) and Avaya (55.93 average bid) are also trading down significantly, and are considered loans of concern by Fitch. Meanwhile, Avaya’s secured notes due 2028 have traded down to 52.25, while Bed Bath & Beyond’s unsecured paper maturing in 2024 last traded at 58.62. Both companies carry a Debtwire ‘Likely to Distress’ score of 95, indicating a high probability of entering into a restructuring. Rodan & Fields carries an LTM score of 92.5, while Jordan Health Services sits at 91.
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