European leveraged credit default rates will peak in March 2021 and moderate later in the year, Fitch Ratings says in a new report.
We have lowered our high-yield bond and leveraged loan default rate forecasts for end-2021 to 2.0% and 3.5%, respectively, from 5.0% and 5.5% in our previous forecast and from 3.3% and 3.7% in 2020. We have also lowered our expectations for 2022 to 3.0% and 4.0% for bonds and loans, respectively, from 4.5% and 4.6%.
This reduction in near-term default rates reflects our expectations for a strong recovery from pent-up demand by 2H21 as vaccine roll-outs take effect and social distancing restrictions gradually ease.
Buoyant capital market conditions reflect confidence in fiscal stimulus programmes to support strong operating recoveries into 2022, while funding markets remain anchored by active central bank interest rate and asset purchase policies.
These factors contributed to a material reduction of names on our Bonds and Loans of Concern lists in January and February, despite higher leverage. Defaulted instruments are not being replaced by new ones as overall credit quality and capital market conditions are stabilising or improving.
Secondary market distressed ratios, which capture bonds and loans trading below 80%, are returning to their pre-pandemic levels.
The trailing-12-months (TTM) leveraged loan default rate surged in February 2021 to 5.3%, the highest level since November 2013, as long-awaited restructurings, distressed-debt exchanges and bankruptcy filings took place. The TTM bond default rate slightly increased to 3.4% in February from 3.2% in January but we expect it to start declining from March.
Effective cost-management and enduring government measures, such as furlough schemes and loan guarantees during the winter lockdowns, along with capital raisings and re-financings in 1Q21, cushioned near-term financial pressures and extended maturity profiles for performing companies, but also many stressed issuers.
