Performing Credit Quarterly 3Q2023: Tails, You Lose?

Summary

• The average debt-to-EBITDA ratio for U.S. leveraged credit was approximately 4.0x at the end of the second quarter, down from 6.5x in 4Q2020.
• Current interest coverage ratios stand at 5.3x for U.S. high yield bonds and 4.5x for U.S. leveraged loans.
• U.S. leveraged loan markets have grown roughly twofold since the Global Financial Crisis, while private credit markets have grown sevenfold.
• Loans with credit ratings of B or below represented almost 75% of U.S. leveraged loans at the end of 3Q2023, compared to roughly 35% in 2000.
• BB-rated debt represents almost half of the high yield bond market, whereas B-rated debt accounts for approximately 65% of the leveraged loan market.
• The ratio of downgrades to upgrades in the loan market has risen to nearly two to one over the last year.
• Median net leverage among private loans was almost twice that of high yield bonds at the end of 1Q2023.
• Roughly two-thirds of outstanding U.S. leveraged loans were unhedged as of year-end 2021.
• Loan-only borrowers experienced a roughly 50% increase in interest expense over the last year, compared to 21% for bond-and-loan issuers and 3% for bond-only issuers.
• Moody's Investors Services projected that 62% of companies with B3 credit ratings would have interest coverage ratios below one by the end of 2023.
• Leveraged loans rated B3 and lower represent the majority of 2024 maturities.
• Almost 40% of the direct lending market is scheduled to mature by year-end 2025, compared to roughly 15% of broadly syndicated loans.
• The global universe of potential dislocated debt has quadrupled since the Global Financial Crisis.
• U.S. investment grade bonds lost 1.2% in the first three quarters of 2023, while U.S. high yield bonds returned roughly 6.0% and leveraged loans returned roughly 10.0%.
• The par value of outstanding high yield bonds fell from $1.6 trillion to $1.2 trillion in the U.S. over the last two years.
• Senior leverage in private credit deals completed in the last year averaged 3.5x, with average equity contributions from sponsors growing to roughly 60%.
• The weakest 20 to 30% of private credit portfolios face a meaningful risk of defaults or write-downs in the near term.
• Back-testing indicates that the strongest performance for CLO equity investors occurs during periods when a majority of loans trade below par.
• U.S. High Yield Bonds returned 0.5% in the third quarter of 2023.