Leveraged Loan Demand Strong Despite Weakening Borrowers and Increasing Defaults

DBRS, Inc. (DBRS Morningstar) published a commentary analyzing the sources of demand for leveraged loans, as well as the impact of the Coronavirus Disease (COVID-19) and related economic fallout on the highly leveraged borrowers that are utilizing this source of funding. The prolonged period of very low interest rates combined with a benign credit environment have contributed to significant demand for riskier, higher yielding investment products over the past decade. This demand is very evident in the growth of leveraged lending, which has reached record levels.

Key highlights include:

-- Significant dry powder is available for investing in leveraged finance assets, driving continued demand.
-- COVID-19 impact includes rising defaults, skyrocketing amendment activity, and continued sponsor support.
-- We see borrower flexibility as diminishing with relaxed covenants and other measures, which could result in higher than expected defaults over the longer-term.

“We expect that the severe and abrupt impact of the coronavirus-related downturn could play through the leveraged lending market for an extended period of time due to various factors. These factors include lower quality loans with fewer covenants, amendment activity and sponsor support. While default rates have increased, we expect that there are certain buffers built into leveraged loans that could cause a delayed impact for weaker borrowers, including covenant relief and sponsor support,” said Lisa Kwasnowski, Senior Vice President.

Notes:
The commentary is available at www.dbrsmorningstar.com.

For more information, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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