At least two energy sector defaults will likely impact the U.S. institutional leveraged loan space in August, according to Fitch Ratings. Missed interest payments for Templar Energy and Stallion Oilfield Services would bring the energy trailing 12-month (TTM) default rate close to 18%.
The July energy TTM default rate climbs to nearly 14% from June's 11.3% level following bankruptcies from C&J Energy Services, Atlas Resource Partners/Atlas Energy and Atinum MidCon I LLC along with a small distressed debt exchange for FTS International's term loan.
"The impact of commodity price pressures has been the largest driver of defaults in the leveraged loan market this year," said Eric Rosenthal, Senior Director of Leveraged Finance. "In fact, nine of the last 10 defaults occurred in the energy space."
August would be the 16th consecutive month for loan defaults involving an energy or metals/mining company. When those defaults occur, energy and metals/mining are projected to account for 62% of total defaults on a volume basis.
Fitch believes the U.S. leveraged loan market is on track for $24 billion of defaults by end-2016, equating to a 2.5% default rate. Factoring in August's anticipated defaults, there has been $15 billion of volume. The July TTM default rate stands at 2.2%, below the historic average of 2.8%.
Fitch's CLO portfolios continue to have manageable exposure to defaults at just 0.4% on average across 250 CLOs.
The overall leveraged loan market also remains resilient. The secondary market shrugged off the UK's Brexit referendum while primary activity picked up due to refinancings.
The full report, "U.S. Leveraged Loan Default Insight: Energy Defaults Continue in Third Quarter, Secondary Market Shakes off Brexit," is available at www.fitchratings.com.