Leveraged Loan Default Threat Is High as Fed Takes Time to Ease

A true recovery in the leveraged loan market will depend on defaults, and how quickly the Federal Reserve eases risky borrowers’ burden with interest-rate cuts.

Leveraged loan prices have gained year-to-date, and James Crombie notes that rising CLO sales spells more gains ahead. It’s hard to disagree, yet supply-and-demand dynamics mask underlying weakness that warrants some caution.

The default rate for US leveraged loans has topped 6% this year so far, nearly triple what it was a year ago, according to Moody’s Investors Service. Junior debt like second-lien loans has disappeared, making recoveries worse for first-lien holders. The ratio between ...