Despite a slow start, 2016 was a good year for the credit markets.
The market value return of the S&P/LSTA Leveraged Loan Index (LLI) was 4.8% in 2016, as the weighted average bid rose nearly seven points, to 98.08. Secondary pricing soared as demand outstripped supply for most of the year. The share of facilities priced at par or higher reached 68.3%, after starting the year at just 1.3%.
Given the steady rise in prices in 2016, it comes as no surprise that the outlook for defaults, based upon LCD’s buyside survey conducted at year-end, became far more optimistic.
At the start of 2016, loan market participants thought default rates would next exceed the historical average in 2017. By the fourth quarter survey, however, the expectation for 2017 had halved, and the prediction was pushed out into 2018 (and for many, into 2019).
But with the lagging 12-month default rate, which was at 1.6% at the end of 2016, rising default rates appear inevitable.
With these factors in mind, LCD has revisited S&P Global Market Intelligence’s LossStats database to take a look at recoveries for the credit markets.