June 28, 2023 - On June 27th, the LSTA and the Creditor Rights Symposium held their Annual Restructuring Symposium, which brings together academics, commentators, and practitioners to discuss the latest trends in defaults, bankruptcies, and restructurings.
The first session of the day, hosted by the LSTA’s Ted Basta and featuring Professor Ed Morrison of Columbia University, Brad Rogoff of Barclays and Carly Wilson of Blackrock, was dedicated to the credit cycle and began with a discussion on how risk is being priced in the primary and secondary loan markets. As overall investor risk tolerance has declined, secondary loan prices have remained rangebound in a mid-to-low 90’s context while credit spreads have widened alongside higher floating rates (new issue yields on single-B loans remain well north of 10%). Panelists pointed out that while the downturn phase of the credit cycle has already begun in earnest – see slide 2 of the presentation – just 7% of loans are trading below 80, with just 3% trading below 70. From a credit perspective, a near-record 25% of loans have either come to market or have been downgraded to B-, with roughly 6% of loans rated in the CCC range. While not alarming ratios, secondary market liquidity levels have become stressed in B- rated loans on negative watch (and below). More specifically for CCCs, there seems to be room for another 3-percentage point increase in their market share before we see any kind of meaningful selling pressures from CLOs. The panelists then discussed the default rate, where despite a 140-basis point move higher over the last twelve months, to 1.6%, it remains well below its historical average of 2.4%. Of course, panelists agreed that interest coverage and free cash-flow ratios are becoming stretched due to an overall weakening economic environment and rising rates. And given that expectations call for another 50-basis point increase in interest rates this year, the economy could in fact fall into a mild recession. In this bear scenario, the default rate would increase to somewhere in the vicinity of 5% by the end of 2024.