Loan default forecast declines as economy emerges from pandemic: Fitch

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Brief description of the dive:

  • Fitch Ratings downgraded its forecast for US loan interest rates from 2.5% to 1.5% as “restricted sectors” reopen due to pandemic restrictions and confidence in capital markets grows.
  • “The default rate at the end of the year could be even lower than projected if current favorable conditions continue,” said Eric Rosenthal, senior director of leveraged finance at Fitch Ratings.

  • The default rate of 1.5% this year will be the lowest since the 0.6% level in 2011. Fitch saidwithout changing its default forecast from 2.5% to 3.5% for next year.

Dive Insight:

Leveraged institutional loans – high-yield loans made to businesses with bad credit histories and high levels of debt – soared in the decade leading up to the pandemic.

The leveraged loan market grew to $ 1.2 trillion in 2019 from $ 500 billion in 2010 as high-yield investors bought up secured loan commitments (CLOs), securities backed by pools of loans using borrowed money, according to GAO

After the coronavirus shock in March 2020, the leveraged loan market recovered as the Federal Reserve cut interest rates to an all-time low and provided unprecedented support to credit markets.

“Together, our actions have helped free up over $ 2 trillion in funding to support large and small businesses, nonprofits, and state and local governments between April and December 2020,” Fed Chairman Jerome Powell said: Today in comments prepared to testify to the House of Representatives Subcommittee on the Coronavirus Crisis.

Leveraged loan default rates are still high for some sectors particularly hit by COVID-19, according to Fitch Ratings. Leisure and entertainment default rates are forecast to remain at 14%, while retail and energy default rates at the end of the year are 7% and 5%, respectively.

Looking ahead into next year, Fitch said its “higher default forecast for 2022 reflects uncertainty about the sustainability of economic recovery in some sectors.”

This year the deal facilitated leveraged lending, according to Fitch Ratings. Companies often use loans to finance mergers and acquisitions. Last month, emissions were $ 46 billion, down 39% from $ 75 billion in April, but “still not bad compared to the historical average.”

In December, the GAO determined that leveraged lending did not pose a significant threat to financial stability. However, the GAO has called on Congress and the Financial Stability Oversight Board (FSOC) to limit the risks associated with lending and other forms of finance.

FSOC, a group of US financial regulators, was formed in 2010 after the financial crisis to identify systemic risks.

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