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JPMorgan reduces HY/loan default forecast for year-end 2020

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JPMorgan has reduced its 2020 year-end default forecast for leveraged loans, due to a “significant” reduction in default activity since August and a better-than-expected economic recovery in the third quarter.

According to a North America high yield research report issued Thursday, JPMorgan has cut its loan default forecast to 4% from the former 4.5% projection.

JPMorgan is maintaining its long-term 3.5% loan-default rate forecast for 2021, the report stated.

The reduction comes despite a five-year high U.S. loan default rate of 4.26% at the end of September, up 10 basis points month-over-month and up 262 basis points year-to-date. The rate was 1.42% for the first nine months of 2019.

The rate is the highest since January 2015 (4.28%).

Four speculative-grade rated companies defaulted on loans and high-yield bonds in December, totaling $2.9 billion ($976 million in loans). The loan defaults include iQor US and FTS International.

For the third quarter, 26 companies defaulted on $19.3 billion in bonds and loans, as well as $3.1 billion through a distressed exchange. The default volume marks the 12th-highest quarterly default total on record, notes JPMorgan.

The volume was down significantly from the second quarter, however, driven by the sudden impact of business shutdowns and closures to stem the spread of COVID-19. Fifty-one companies with $80.3 billion in defaulted debt (including distressed exchanges) during the second quarter was the second-highest total on record, trailing the $80.5 billion during the first quarter of 2009 at the height of the housing-market financial crisis.

In the first nine months of the year, 78 companies defaulted on $114.3 billion in bonds and loans, along with 14 distressed transactions totaling $9.1 billion, according to JPMorgan.

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Corporate defaults Leveraged loans CLOs CDOs