Deteriorating Outlook for Leveraged Market After Challenging 2023:

Fitch Ratings-New York-08 April 2024: The leveraged finance market is showing some signs of improvement even though the outlook for the sector is deteriorating, Fitch Ratings says in The 2024 Annual Manual: A Primer on the U.S. Leveraged Finance Market, published today. The prognosis for this year comes as issuance volumes improved in 2023 despite it being a challenging environment for the market.

“Although the outlook for leveraged finance is deteriorating, there are signs of improvement.” said Joshua Clark, Director in U.S. Leveraged Finance at Fitch. “Fitch’s deteriorating outlook for leveraged finance at the onset of 2024 reflects sustained tighter access to capital markets and higher-for-longer interest rates pressuring highly levered issuers”

Fitch anticipates leverage loan and high yield defaults will increase, reflecting the pressures of greater interest expense burden and the challenges stemming from the expected slowdown in economic growth. 2023 saw an increase in credit defaults, with U.S. institutional leveraged loans and high yield bonds defaulting at 3.3% and 3.0%, respectively.

Although outstanding syndicated leveraged loan volume remained flat and the size of the high yield market contracted, issuance volumes for each were up in 2023 compared with the previous year. Repricing and refinancing activity rebounded, with borrowers coming to market to address looming maturity walls. M&A and LBO activity also fell as higher rates depressed appetite for new issuance, and uncertainty surrounding an economic slowdown.

Private credit markets, however, continued the positive growth trend. This reflected a greater share of large deals being funded by direct lenders who stepped in to fill the gap created by a syndicated loan market that was closed to lower quality issuers.

Fitch’s 13th edition of The Annual Manual is a primer on the U.S. leveraged finance market. This report quantifies and summarizes the major factors driving risk and opportunity for various market participants, including corporate high-yield bond and leveraged loan originators and investors, CLO managers and investors, speculative-grade corporate debt issuers, private equity sponsors and regulators. The Annual Manual spotlights the evolution of the market as new participants, transaction characteristics and regulatory developments emerge.