Companies are coping well, even if they’re not out of the woods yet

The default rate has fallen to a notably low level thanks to government support, but there should be no room for complacency.

In the early months of the covid pandemic, it would have taken a brave forecaster to predict that default rates would be where they currently are. The most remarkable aspect of the latest Proskauer Private Credit Default Index for Q2 2021 is that – far from the Armageddon that might have been expected – companies are resisting distress even better than they do in what might be termed ‘normal’ times.

The average historical default rate is typically assumed to be somewhere around the 2 percent mark, whereas the index shows the latest rate for senior secured and unitranche loans standing at a very modest 1.3 percent. If there were fears of a default crisis, what has transpired is closer to the opposite – rarely has the figure been this low.

“Default rates have continued to decline as the economy re-opens,” says Stephen Boyko, co-chair of Proskauer’s corporate department and private credit group. “We are seeing plenty of liquidity in the market and our clients remain bullish about the health of their portfolios.”

This healthy picture coincides with news that, in the UK, so-called ‘bounce back’ loans (a form of state-backed emergency government financing) appear to have put many companies back on the straight and narrow. The Office for Budget Responsibility predicted in December that as much as £19 billion (€22 billion; $26 billion) of taxpayer money may be lost through the scheme, but the latest estimate puts this figure at around a likely £5 billion.

But no one should be assuming that the bullet has been dodged. Reflecting on the encouraging signs for bounce back loans, Simon Fry, a partner at boutique advisory firm ReSolve, cautions: “What will be key in telling us if the default rate will continue to stay low is how companies prepare for when the government support fully stops.”

Memories can fade quickly, and the 8.1 percent default rate reached in the second quarter of last year already seems like a distant memory. Few will be expecting rates to climb that high again in the near future, but Fry’s words are a useful reminder that no one really knows what lies around the corner.

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