As the US loan market continues to grow and the issuance of collateralized loan obligations (CLOs) hits record highs, Standard & Poor's Ratings Services notes the growing number of “B” rated debt issues with “3” recovery ratings over the past year, and the rising level of first-lien leverage multiples since 2008, as signs that credit quality and recovery prospects are diminishing across the senior secured debt spectrum.
A Standard & Poor's report published Nov. 11, titled “Will Record US Loan Issuance Diminish Recovery Prospects for Lenders and Investors?,” examines the increase in new senior secured debt financings residing in the “B” issue-level rating the “3” recovery rating category, and looks at the potential impact it could have on recovery prospects.
“We believe investors should pay close attention to credit quality and risk standards in this asset class at this stage of the credit cycle,” said Standard & Poor's John Sweeney, the primary credit analyst on the report. “The majority of issues in this asset class reside in what the loan market considers the 'sweet spot,' with attractive yields and leverage approximately at levels exhibited prior to 2008. The openness of the US capital markets, low interest rates, and continued strong investor appetite for higher yield drives this asset class' growth. However, a reversal in any of these conditions could hamper the ability to refinance these assets, and potentially weaken their recoveries.”