Deutsche Bank expects jump in leveraged loan defaults

On Monday, Deutsche Bank officials noted that U.S. leveraged loans default rate would end 2024 at 11.3%, according to their forecasts. The 2024 anticipated default rate on euro leveraged loans will equate to roughly 7.1% amid a worsening global economic situation. 

As for the forecasts for 2023, the volume of defaults will remain at about the same level as there will be no near-term maturities. The banking institution expects default rates on leveraged loans to hit 5.6% in U.S. dollars and 3.7% in euros. However, we are likely to see a rise in default rates in 2024. 

Such loans are popular among companies with high debt levels and credit ratings below investment grade. Deutsche Bank analysts predict that companies with high total debt-to-revenue ratios will deal with a significant cut in net profits as there’s high probability of an economic downturn in the U.S in the second half of 2023. 

With an increase in the volume of defaults, lenders will only be able to recover 50-60% of face value if they fail to make required payments on a debt amid possible recession.

As reported by Deutsche Bank, leverage among European issuers has not seen such a rise, as in the American credit markets, although it remains on a high level. The high-yield bond market in euros has higher credit ratings than in the U.S. dollars.