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Fitch ratings says the cumulative effect from the Covid crisis worse than the financial crisis of 2008-2010. The U.S. leveraged loan default rate to top high yield in 2021 as YTD Default Rate Hits 4%. Nearly 40 percent of the leisure/entertainment universe could default by YE 2021.

US Default rate

The institutional term loan default rate is expected to remain at or above 5 percent annually through 2022, translating to a three-year cumulative rate of 17-20 percent, according to a new Fitch Ratings report.

"The forecasted three-year cumulative default rate reflects the coronavirus pandemic and its effect on the economy, and tops the 15 percent rate following the 2008-2010 Great Recession," said Eric Rosenthal, Senior Director of Leveraged Finance. "In nine of the last 13 years, the loan default rate finished below high yield but is expected to reverse in 2021."

From Fitch:

The percentage of institutional loan issuers rated 'B-' or lower is higher than high yield, at 37 versus 12, respectively. This contributes to our expectation that the loan default rate finishes above high yield in 2021. This is further reflected by the Top and Tier 2 Loans of Concern lists being approximately twice that for bonds. Fitch expects the loan default rate to finish 2021 at the lower end of 7-8 percent.

This is down from the previously anticipated 8-9 percent forecast in March but still surpasses the projected 5 percent rate at YE 2020.

  • Nearly 40 percent of the leisure/entertainment universe could default by YE 2021, with movie theatres and gyms leading the way.
  • Retail, at 18 percent, 
  • Energy, at 9 percent, are expected to have higher defaults than the overall 2021 average.

The Top Loans of Concern total stands at $54.1 billion, up from $51.3 billion in September.

  • Fitch's Top and Tier 2 Loans of Concern combined total is at $244.5 billion, or 17 percent of the index.
  • The October trailing-12-month default rate is 4.3 percent, while the year-to-date level hit 4 percent.

Source:  "U.S. Leveraged Loan Default Insight Report: Loan Default Rate to Top High Yield in 2021; YTD Default Rate Hits 4%,"

From The TradersCommunity Research Desk

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