Repeat Defaults Hit Record High in Leveraged Loan Market: JPMorgan

A record number of companies repeatedly defaulted on their debt in 2024, according to a JPMorgan Chase & Co. report cited by Bloomberg. This trend underscores the continuing strain on corporate balance sheets, particularly within the leveraged loan market where interest rates are increasing.

The JPMorgan report reveals that roughly 35% of defaults and distressed exchanges in 2024 involved companies that had previously defaulted at least once, marking a historic high. This coincides with a leveraged loan default rate that has reached a four-year peak.

The persistence of high-interest rates for a significant portion of 2024 weighed heavily on the financial health of lower-rated companies. This impact has been particularly pronounced in the leveraged loan market, where issuers borrow at floating rates. As the Federal Reserve raised interest rates, borrowing costs for some companies nearly doubled. Although the Fed cut rates three times last year, it signaled a slower pace of future cuts in 2025.

The leveraged loan market's vulnerability stems from its higher concentration of lower-rated issuers. Private equity firms actively utilized this asset class during the period of near-zero interest rates. This has led to a substantial divergence in default rates. By year-end, the US high-yield bond default rate stood at 1.47%, while the loan market default rate reached 4.49%, representing a 24-year high gap between the two.

Companies saddled with high debt levels have increasingly resorted to liability management exercises to restructure their capital structures. A record 70% of the 2024 default and exchange volume was attributed to distressed exchanges, according to JPMorgan's report.

However, these transactions often prove insufficient to fully alleviate debt burdens, leaving companies susceptible to further defaults. This creates a significant risk for investors who may face even lower recoveries.