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In line with reasonably strong revenue and EBITDA growth rates over the past few years, default rates are currently at near-historic lows. The high yield and leveraged loan trailing 12-month default rates as of June 30 were 1.46%1 and 1.30%,2 respectively. For context, the long-term averages for high yield and loans are 3.46%1 and 3.07%.2

A good indicator of possible future defaults in both the loan and high yield markets is the distressed ratio. For loans, this is defined as the percentage of loans trading below 80 cents on the dollar. Periods of higher default levels are typically preceded by rising distressed ratio levels – the distressed ratio peaked at 81%2 in November 2008 before major defaults started in 2009. As of May 31, 2019, the distressed ratio sits at 2.36%,2 in line with the 3-year average. To put this in context, even if every distressed loan today were to default, the default rate would be just 2.36% higher than it currently is – still not much higher than long-term averages.

The distressed ratio in the high yield market is defined as the percentage of bonds (by market value) with spreads wider than 1,000 basis points. As of May 31, 2019, this ratio was 5.23%.3 While somewhat higher than in the loan market, this ratio is still in line with the 3-year average and in line with our expectations given the spread widening following both Q4 2019 and May’s bouts of volatility. We believe that due to these relatively low distressed ratios and solid credit fundamentals, default rates are likely to remain below their long-term average for the balance of 2019.



1 J.P. Morgan.
2 S&P/LSTA Leveraged Loan Index.
3 Bloomberg.


All data as of June 30, 2019, unless otherwise noted.

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