Lower-quality borrowers struggling with liquidity, Morningstar DBRS says
Lower-quality borrowers are increasingly struggling with liquidity, Morningstar DBRS has warned.
The ratings firm said the worsening liquidity position has contributed to recent negative credit rating actions.
However, despite the liquidity position of these borrowers weakening over the past three years, co-operation between sponsors and lenders has helped to keep default rates low.
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Morningstar DBRS’ findings are from a review of a subset of privately rated middle market companies rated B (low) and lower.
Half of the lower-rated issuers the firm analysed have received some form of liquidity support from capital providers, which has enabled them to stay afloat.
The firms most at risk of default are those from older vintages, Morningstar DBRS said, as deals underwritten before mid-2022 were structured under very different market conditions.
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Citing figures from Pitchbook LCD, the firm said the average default rate, including distressed exchange transactions, of the Morningstar LSTA US Leveraged Loan Index, reached 4.2 per cent as of September 2024, up more than 300 basis points since the end of 2021.
“Our review of issuer vintages confirms that the highest level of vulnerability lays with transactions underwritten during the zero-interest rate era from 2018 to 2021,” the firm said. “We expect a higher frequency of payment defaults for these older vintages if interest rates remain elevated for an extended period.”
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