Investors worry as leveraged loan market gets more junkie

Deeply in the junk: Over a third of leveraged loans in the US are now rated B-minus or below

A wave of downgrades pushed the ratings of more than a third of the US $ 1.2 billion leveraged loan market to less or less, the highest share on record, as fallout from the Coronavirus pandemic hangs over businesses across the United States.

Credit ratings on loans worth $ 369 billion were downgraded by S&P Global this year. The credit quality of more than a tenth of loans within the S & P / LSTA leveraged loan benchmark are now rated at C, double C or triple C – ratings that often signal that a company is facing serious financial difficulties.

The weakening creditworthiness of many of the companies borrowing in the leveraged loan market has set off a wake-up call for investors, even as stock markets have rebounded to record highs. The loan market is a critical source of funding for mid-sized US businesses and debt buyout firms. Its size has more than doubled over the past decade.

Even though loan prices have rallied over the past decade, the pace of rating downgrades has been catchy. According to analysts at LCD, a unit of S&P Global, downgrades have exceeded upgrades by a 43-to-1 ratio in the past three months.

Decommissioned transmitters include Bass Pro Group, fishing and hunting supplies retailer, hospital owner LifePoint Health, and medical staffing company Envision Healthcare.

“We predict that the coronavirus pandemic will cause the US economy to weaken, with high unemployment and reduced consumer spending this year,” said Mathew Christy, analyst at S&P, when downgrading Bass Pro Group to B single from B plus.

He added that S&P expected declining revenues and profitability to push up Bass’s debt ratios significantly. Investors fear that many more companies will struggle to repay their debts if incomes remain depressed.

Rating downgrades are already proving problematic for managers of loan pools known as secured loan bonds, who are among the largest owners of leveraged loans. CLOs have restrictions on their ownership of triple C-rated loans, and many are approaching or exceeding those limits, data from S&P showed.

Dan Ivascyn, chief investment officer at Pimco, warned that the consequences of deteriorating loan quality will trickle down to the market for some time. Downgrades will continue to come “even in a fairly robust recovery,” he said.

Priscilla C. Carnegie