While prices on speculative-grade bonds and leveraged loans suggest that the U.S. leveraged finance market has stabilized since the severe disruption of 2008-2009, Standard & Poor’s Ratings Services believes risks remain, especially for borrowers at the lower end of the credit spectrum.
Credit spreads (the market price for credit risk) have dropped sharply from the record highs of the first half of 2009, with secondary-market spreads for borrowers in the Standard & Poor’s/LSTA Index falling to less than 600 basis points (bps) from more than 2,000 bps for issuers in the ‘B’ rating category (which includes ‘B-’, ‘B’, and ‘B+’) (see chart 1). But in our view, credit spreads alone don’t tell the complete story with regard to credit, especially during periods of extreme market turbulence.
When we focus on the fundamental credit analysis expressed in our ratings, we see a more mixed leveraged credit profile than current pricing indicates.
When it comes to the two key elements of credit risk–default and recovery risk–Standard & Poor’s ratings show that credit conditions for speculative-grade bonds, notes, and loans have improved at the margin, but remain fragile, especially for borrowers in the ‘B’ and ‘CCC’ rating categories.