Leveraged Finance 2014: Most Speculative-Grade Ratings Will Remain Stable, But Credit Risks Persist

Standard & Poor’s believes most speculative-grade ratings will remain stable this year. However, investors will continue to stretch for yield and encounter credit risks. In this CreditMatters TV segment, Managing Director Andrew Watt discusses the positive and negative trends shaping the leveraged finance market.

Welcome to credit matters my name is an charlotte peterson senior director in the loan in recovery group and i’m joined today by andrew watt managing director and head of the loan and recovery team to discuss our credit view of the leveraged finance market following his recent article so andrew what are the key areas that we focus on in leveraged finance so in charlotte

There are three areas that we look we look towards we take a good hard look at our spec grade ratings and the trends within our spec rate ratings we do a lot of analysis around loans particularly around leveraged loans and third something that’s near and dear to both our hearts we spend a lot of time looking at recovery prospects as we go through the cycle so what

Are our expectations for the leveraged finance market in 2014 our overall theme for leverage finances that investors are stretching for yield and in that stretch for yield they are at times encountering risks that they may not fully appreciate and we’re applying specifically on credit risk issuers certainly have more sway in the market and so from that perspective

Issuers are getting terms that are more certainly more conducive to what they are looking for and the market is flush with investor interest or you know just to give you an example the leveraged loan market you’ve seen eighty nine consecutive months of funds inflows into the markets of the market is flush with individuals looking for our companies actually looking

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For opportunities in terms of what our expectations are for the spec rate market to answer your question more directly we believe our ratings outlooks are a good indicator of credit quality if you look at ratings outlooks for the spec rate market eighty percent of our ratings outlooks are stable so and that’s that’s actually abnormally stable for for us usually

We’ve seen a bit more dispersion around its positives and negatives so certainly the outlook in the near term is stable and that’s driven by a few factors certainly our teams when we look at revenue and profitability growth we expect that to happen when you look at what our chief economist expects for 2014 she expects three percent gdp growth and when you look at

What our global fixed income research team looks for in terms of our spec rated for way for 2014 that default rate still silver lotia the norms it’s a two point five percent although it is rising slightly from 2.1 percent in 2013 so these are supporting factors what our concerns for the market so our concerns i would put it in in three two and three broad buckets

One is as we look at debt to ebitda as a leverage measure we see on our overall spy grade portfolio that measure is trending up it’s roughly around the the 4.7 number right now turns right now but that’s one concern the other concern is that when you look at a lot of the loan transactions that we analyze you see lender protections are weakening and you can see that

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As you go through the loan docs and understand what’s going on there and the third thing is when you look at the use of financing proceeds a nice way to maybe capture what we’re seeing and you look at what will happen in 2013 you will see that dividend transactions really reached a record in terms of the financing associate with different transactions and they’re

Over fifty four billion dollars were issued for dividend transactions so there’s been a lot of interest in recovery ratings in the market this year and we’ve just published an update to our performance study and what are some of the trends that we’re monitoring in recovery ratings so if you look at our overall portfolio you’ll see upgrades to downgrades in 2013

For our recovery portfolio was relatively even but when you dig a little deeper what you’ll see is the central tendency particularly for secured transactions was roughly around the two bucket you’ll see on the screen what are our recovery rating is actually aligned to and now you see that tendency shifting more towards the three area not it it’s not there but it’s

Shifting more towards that and there are a couple of reasons for that one is that we believe the increasing debt leverage which i mentioned before is driving that but also the shift in cap structure we have seen just more of a preponderance of senior debt being issued is also driving that thank you very much ender thank you and thank you for joining us today on credit matters you you

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Transcribed from video
Leveraged Finance 2014: Most Speculative-Grade Ratings Will Remain Stable, But Credit Risks Persist By S\u0026P Global Ratings