US leveraged loan from Weakest Links returns to pre-pandemic level

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Favorable financing conditions for riskier companies and a stronger US economy have helped bring the number and share of US leveraged Weakest Links lending to pre-pandemic levels. By the end of March, the number of the weakest links in leveraged loans, according to LCD, fell to 191 issuers, the third consecutive quarterly decline since the pandemic’s peak of 329 in June 2020. Although the current value is higher than at the end of 2019. (145 issuers), that’s below any quarter of 2020.

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As a result, Weakest Links’ loan market share fell to 14% as of March 31, the lowest level since the end of 2019 (11%) and a sharp drop from a peak of 25% in June 2020.

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The LCD’s weakest links are loans in the LCD universe with a corporate credit rating of B- or lower and a negative outlook from S&P Global Ratings. The Weak Points Loan Component may change historically as LCD coverage expands the pool of loans tracked for the purposes of this analysis.

The set of weakest lending links shrinks when more loans emerge from the cohort – either due to default, rating upgrades, better forecasts, or revocation of ratings – than join the cohort. The biggest driver of the decline in the number of weakest links in the first quarter of 2021 was the improved forecasts for 55 issuers. While these companies are still rated B- or Triple-C, most now have a stable outlook. This cohort also includes 14 borrowers who were promoted in addition to the outlook change, but who remain in Group B or below.

The speed at which loan borrowers are becoming weak links has slowed markedly as updates began to outpace the downgraded ratings this year. In the three months ended April 30, the up-to-down ratio in the S & P / LSTA leveraged loan index exceeded 2x. In fact, LCD added just eight issuers to its weakest cohort in the first quarter of 2021. For comparison: in the second quarter of 2020, against the backdrop of a downgrade wave caused by the pandemic, 137 borrowers joined the ratings of the weakest links.

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However, many of the weakest links of the COVID-19 era have come and gone with the pandemic and subsequent market recovery. Of the 329 names on the list at their peak in June 2020, 116 borrowers were not in the cohort before the pandemic, as of December 2019, and are not in the cohort now. The improved US economic outlook has played a role here, as well as favorable financing conditions for lower-rated companies, allowing issuers to manage short-term maturities and / or reduce their borrowing costs.

Indeed, in the first quarter of 2021 alone, B–rated issuers raised $ 54.6 billion in the debt market to refinance existing debt. This is an all-time high, close to the 2020 annual rate of $ 55.1 billion and surpassing the full 2019 annual target of $ 32.9 billion. This analysis is based on borrowers rated B- or B3 by at least one rating agency.

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In addition, a record $ 15.6 billion of refinancing-related securities were placed on the high yield bond market in the first quarter for companies with split B / CCC ratings or below, up from a quarterly average of $ 3.5 billion. US dollars in the previous three years.

This activity helped some of the Weakest Links loans to leave the cohort. For example, in February Party City Holdings Inc. placed a $ 750 million five-year first collateral bond to repay Borrower’s Loan B of $ 720 million due in August 2022. The news of the growth in debt prompted an increase in the ratings of S&P Global Ratings and Moody’s. The borrower’s rating was upgraded by S&P Global Ratings to CCC +, with a positive outlook from CCC and a negative outlook, which excluded him from the list of weak links. Party City joined the list in the first quarter of 2020 when the pandemic began.

Most recently, Encino Acquisition Partners LLC completed a $ 700 million seven-year unsecured bond offer to repay all outstanding loans under the company’s second collateralized loan, with the remainder of the proceeds going towards repaying the revolving line of credit. The borrower is currently rated B- by S&P Global Ratings and has been on the weakest link since March last year due to a negative outlook. Last month S&P Global Ratings revised outlook to stable after refinancing attempts, and as a result, LCD will remove the borrower from the cohort of the weakest links at the end of the quarter.

Industry analysis
In the past year, the impact of the COVID-19 rating downgrade and deterioration in forecasts has spread across all sectors. By March 2021, some industries had returned to near-pre-pandemic concentration of risky borrowers, while others remained elevated compared to December 2019. Only two sectors – leisure and clothing / textiles – have expanded the ranks of weak links between the peak of the pandemic. in June 2020 and today.

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In March 2021, LCD tracked 22 Leisure names, five more than in June 2020 and 19 more than before COVID-19. This cohort grew rapidly amid declining ratings associated with social distancing measures during the pandemic. At the end of the first quarter, Leisure took the lead in the Weakest Links rankings, displacing 21 names from Electronics / Electric (the representative of LCD in the technology sector).

The retail and oil and gas sector, two sectors that have dominated the pattern of corporate defaults in recent years, now have fewer weaknesses than at the end of 2019. moved to the default category last year.

Overall, the number of defaults and restructurings in LCD weak link analysis fell to 35 borrowers as of March 31, lower than any quarter of 2020, but exceeding 27 at the end of 2019. As a reminder, the number of borrowers reached 54 as of September 30, the highest since the start of this analysis in 2013.

More broadly, at the end of April, the default rate on US loans by value fell to 2.61%, from 3.15% in March, and now stands at 156 basis points from the 4.17% cycle peak in September 2020, according to S&P / LSTA Leverage Index.

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