With no defaults in the S&P/LSTA Leveraged Loan Index in August the lagging-12-month default loan rate by principal amount fell to a five-month low of 3.61%, from 3.89% in July. Of course, that number is inflated by Energy Future Holdings’ massive $19.5 billion default, from April. Excluding EFH, the rate by amount eased to just 0.44% in August, from 0.62% in July.
Because EFH’s default is considered an aftershock of the 2009 default spike – the issuer was able to stave off bankruptcy for several years by dint of financial engineering, along with natural-gas hedges that expired in 2013 – most managers view the default rate by number as a better measure of the state of credit problems today, as EFH is not given an outsized weighting. By this measure, the default rate fell to a 29-month low of 0.80% in August, from 0.96% in July.
August’s reading leaves the default rate by number 2.2 percentage points inside the historical average of 2.96%. By amount, meanwhile, the rate is 0.39 points above the long-term average of 3.22%, or 2.7 points below it excluding EFH.
Looking ahead, most managers expect low default rates to persist in the near term, according to LCD’s latest quarterly buyside survey (available to LCD News subscribers, please click here) from early June. On average, participants said the default by amount (excluding EFH) will creep to 1.48% by year-end (or 4.81% including EFH). Looking out further, managers expect the rate to push to 1.76% by June 2015 (by which time EFH will have dropped from the lagging-12-month rolls).