The Federal Reserves’ tapering programme and improved access to yields on the secondary market could cause default rates to creep upwards, according to a recent survey conducted by Debtwire and law firm Bingham McCutchen.
In last year’s survey, 100 percent of respondents said they expected default rates to be in the 2.1 percent to 4 percent range during 2013. This year, 21 percent of those surveyed said they believed default rates would creep above 4 percent over the next year, and could reach as high as the 5.1 percent to 6 percent range.
“The Fed’s December tapering decision will likely make lending standards tougher and make yields more accessible in the secondary market,” according to the report. “This dynamic could lead to distressed triggers getting pulled, setting off a wave of defaults for at-risk credits unable to garner capital market support.”
High volumes of liquidity and improvements in the capital markets led to a glut of high yield and leveraged loan issuance over the last few years. Many market sources have argued that lending standards fell dramatically during that period, which could have adverse consequences when the cost of capital for loans increases or when troubled companies reach the end of their maturities over the next several years.
Despite growing wariness of default rates, more than 40 percent of respondents indicated that they intend to invest 25 to 50 percent of their assets in the primary high yield or leveraged loan markets next year.
The study included responses from hedge funds, private equity firms, institutional investors and sell-side trading desks. 19 percent of respondents described their organisation’s core strategy as distressed debt.