Modest Recovery for US Leveraged Finance Despite Tight Credit Conditions

The U.S. high yield and leveraged loan markets recovered modestly in the first quarter of 2009 (1Q'09) following the steepest declines in the history of either market, according to Fitch Ratings Leveraged Finance Quarterly. The improvements in performance and issuance came, however, as default rates continued to rise and credit quality worsened.

High yield bond issuance in 1Q was $12.4 billion compared to just $1.4 billion in 4Q'08. This marked the first quarterly increase in issuance since 1Q'08. Syndicated loan issuance totaled $105 billion in 1Q, down 42% compared to 1Q'08 while leveraged loan issuance plummeted 57% over the same period to $27.3 billion from $64 billion.

In a clear sign of the demise of leveraged buyout (LBO) activity, loans for LBOs totaled just $100 million in 1Q'09 compared to $5.4 billion in 1Q'08. Another indication of tight credit conditions: institutional loan issuance dropped to just $1.9 billion, down 88% from $15.8 billion in 1Q'08. To put this in perspective, institutional issuance peaked at $145.2 billion during 1Q'07.

"The leveraged finance markets began to show signs of improvement during the 1Q'09 as market participants speculated that the recession was beginning to bottom out," said Eric Tutterow, Managing Director, Leveraged Finance, Fitch Ratings. "Risk tolerances clearly improved as indicated by narrowing spreads on speculative grade issues."

The default rate, as measured by Fitch Ratings, continued to climb in 1Q, reaching 13.3% on a trailing 12-month basis at March 31, 2009. The year-to-date default rate stands at approximately 8.5%. Downgrades dominated Fitch's speculative-grade rating actions during the quarter, with 73 Issuer Default Rating (IDR) downgrades compared to only five upgrades. Downgrades were not confined to any specific industry, as opposed to other quarters, further indicating the recession has now affected most sectors of the economy.

The full 'U.S. Leveraged Finance Quarterly Review' is available on the Fitch Ratings' web site at www.fitchratings.com.