Moody’s anticipates huge increase in leveraged loan defaults
In a trend likely to accelerate in 2009, the default rate on bank loans to speculative-grade corporations rose sharply in 2008 and recovery rates on leveraged loans dropped over the same period, according to a new study from Moody’s Investors Service.
“Given tight credit markets, a worldwide economic slump, and a deteriorating issuer ratings mix, we expect default rates on leveraged loans will continue to climb in 2009, while recovery rates are expected to fall further,” said Sharon Ou, Assistant Vice President in Moody’s Credit Policy Default Research Group.
Moody’s U.S. leveraged loan default rate ended 2008 at 3.5%, up from the 0.3% recorded in 2007.
The ratings agency forecasts that 11.1% of U.S. leveraged loan issuers will default by the end of 2009.
First-lien loan recovery rates fell to 63.4% at the end of 2008, down from 68.6% at the beginning of the year. By comparison, senior unsecured bond recovery rates dropped from 61.8% to 33.0% during the same period.
Across industries, the Hotel, Gaming, & Leisure sector together with the Construction & Building sector accounted for almost one fourth of the loan defaulters in 2008. Measured by default volume, the most troubled sectors were Construction & Building with 21% of total volume and Diversified Media with 19% of total volume.