Ratings agencies see brighter prospects for highly leveraged borrowers this week, by issuing revised year-end default rate expectations far below those held at the beginning of 2021.
S&P Global Ratings on Monday lowered its default forecast for year-end 2021 on its S&P/LSTA Leveraged Loan Index to 2.75%, down from 3.5%.
Similarly, Fitch Ratings also dropped its projected defaults for leveraged loan issuers to 2.5%, down from 4.5%.
Both agencies cited the increasingly sunny economic outlook driven by the reach of COVID-19 vaccination efforts.
"Operating conditions are starting to improve due to the ramp-up in coronavirus vaccinations and the easing of restrictions," said Eric Rosenthal, Senior Director of Leveraged Finance. "A continuation of the current strong economic backdrop could result in the rate dropping even lower, to around the 1.8% mark registered in both 2018 and 2019."
Fitch’s lowered projections include loans in the leisure/entertainment industry that has been hammered by the pandemic. Fitch said in a release it reduced the default-rate forecast to companies in those segments to 18% from 30%, “and the rate could potentially finish even lower at around last year’s 9.9% mark.”
S&P stated that December’s federal fiscal stimulus should “provide a tailwind” for consumer and business demand in the second quarter “that continues into the second half of the year.”
The actions come after a week after Barclays Plc reported an “extremely benign default environment” for high-yield bonds and leveraged loans in 2021, driven by better expectations for U.S. GDP growth, looser lending standards and strong new issue markets, strategists led by Bradley Rogoff wrote Friday.
