The count of Weakest Links—a demonstrated indicator of future potential default activity—increased for a second consecutive quarter as leveraged loan issuers increasingly grapple with tightening credit conditions and costlier financing terms.
Weakest Links are leveraged loan issuers rated B-minus or lower (excluding defaults) by S&P Global Ratings with a negative outlook or implication. The analysis is based on credits in the Morningstar LSTA US Leveraged Loan Index. However, if a credit exits the index, it remains in the Weakest Links universe until its rating is withdrawn or it defaults, or the issuer nets an upgrade or improvement in outlook to its corporate credit rating.
The number of at-risk leveraged loan issuers tracked by LCD increased to 148 in the first quarter, from 143 at the end of 2022. The first-quarter count compares to a multi-year nadir of 96 in June 2022, and the latest reading is the highest since December 2020 (248) while also rising above pre-pandemic levels at the end of 2019 (145).
With the increase, the Weakest Links' share in the Morningstar LSTA US Leveraged Loan Index is 11%. Though nearly unchanged from the previous quarter following a rise in the underlying loan universe within this analysis, the share has climbed from 7% at the midpoint of last year.
The first-quarter increase in issuers populating the loan Weakest Links cohort comes as the number of restructurings — be that a distressed exchange or payment default — increased to 12.
All told, 118 of the 148 loan issuers in the March cohort were also included in December’s cohort.
The count with higher-risk triple-C and double-C ratings fell to 89 in the first quarter, from 93 at the end of 2022. Of the 12 issuers with D or SD ratings at the end of March (on a trailing twelve month basis), seven had triple-C or double-C ratings in the previous quarter.
Technical imbalance
Leading the ranks once again was the Technology sector (listed in this analysis as Electronics/Electric), accounting for 16% of the loan Weakest Links as of March 31, flat with its share at the end of 2022. Rising sector-level distress and the sector’s outsized share in the leveraged loan market are both factors in Tech's prominence on the list. In the vulnerable category of triple-C ratings, 10 of the issuers are Tech names, with two companies, Exela Technologies and Diebold Nixdorf, currently on LCD’s shadow default list.
The Healthcare sector booked a significant rise in Weakest Link issuers, with its tally growing to 19 at the quarter-end reading, from an already elevated 16 issuers at the end of 2022. Twelve of these names fall into the triple-C category.