“For U.S. leveraged loans, the 12-month-trailing default rate (based on the number of loans) increased to a 57-month high of 4.35% in December from 3.32% in September and 0.26% 12 months earlier, according to Standard & Poor’s Leveraged Commentary and Data group. The leveraged loan default rate has increased markedly and is now above its historical average of 3%. The loan distress ratio—defined as the percent of performing loans trading below 80 cents on the dollar—catapulted up to 87.5% at the end of December from 78.9% in September and 13.4% a year ago.”
The report does not estimate 2009 leveraged loan default levels, but does predict that overall default rates will continue to increase. What this basically means is that buyout firms are going to have to begin acting a bit more like venture capitalists – cutting bait with certain portfolio companies deemed to be lost causes.
To get a better sense of how sharp the leveraged loan distress ratio rise has been, take a look at the following chart that compares it to speculative-grade defaults: