U.S. leveraged loan defaults headed towards near record high in 2024 – Deutsche Bank By Reuters

(Reuters) – Default rates on U.S. leveraged loans will hit a near-record high of 11.3% in 2024, while defaults on euro loans will hit 7.1%, Deutsche Bank (ETR:) said in a note on Monday.

In contrast, the lack of near-term maturities – compounded by the lack of terms limiting what companies can do known as covenants and the presence of large equity cushions – will keep 2023 defaults in check. The bank expects a 5.6% default rate in the U.S. and 3.7% rate in the euro market respectively.

However, a compression of profit margins will eventually expose high leverage levels, leading to distressed exchanges and missed interest payments, triggering an increase in default rates in 2024, the bank said in the note.

On a brighter note for European issuers, leverage, despite being high, has not increased as much as in the U.S. credit markets, while the euro high-yield bond market has higher credit ratings than its U.S. counterpart, Deutsche Bank said. The bank suggested that European credits should fare better in the upcoming downturn than their U.S. counterparts.

High-yield bond markets are expected to look more resilient on both sides of the Atlantic, with Deutsche Bank expecting default rates of 2.2% in 2023 and 4.3% in 2024 for the euro market, and 4.5% and 9% respectively for the U.S. market.