Banking & Finance

Leveraged Loan Default Rate Forecast at 2.5% for 2016

So far in the month of December, three companies in the energy sector have combined to add $1.8 billion in default volume to the year-to-date total in institutional leveraged loan defaults. The three defaults will push the default rate even higher than the current 11-month rate of 1.7%.

The data come from the latest report on leveraged loan defaults from Fitch Ratings. The firm also forecasts that the leveraged loan default rate in 2016 will rise to 2.5%, or $24 billion.

The three energy companies that have filed for bankruptcy so far in December are Vantage Drilling, Energy & Exploration Partners and Magnum Hunter Resources.

Magnum Hunter filed its application for Chapter 11 protection on Monday and received court approval on Thursday for debtor-in-possession (DIP) financing on an interim basis. The DIP financing provides for a $200 million senior and junior secured multi-draw term loan, approximately $40 million of which already has been made available.
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The energy sector default rate for the trailing 12 months (including the December defaults) amounts to nearly 10%, according to Fitch Ratings. At the end of November, the trailing 12-month rate among energy-related companies was 5.9%.

At the end of the day last Monday, the institutional term loan market was trading at an average bid of 93.5, down from 95.0 a month earlier. Some 43% of loans in the energy sector are currently being bid below 80 cents on the dollar.