1. Your team is anticipating a mild default rate for bank loans in 2023. Can you tell us more about what shapes your view?
That’s right, we do believe that defaults in the bank loan asset class are likely to be mild in 2023. That’s because in order to default, a company needs to miss a payment of some kind, whether it’s an interest payment or a maturity payment. First we’ll consider the likelihood of the former. There are about 1,500 loans in the Morningstar LSTA Leveraged Loan Index, and Loomis Sayles owns about a third of them. We see companies that are in relatively good shape coming out of the pandemic. While elevated, we don’t think interest expenses are beyond what properly levered companies can handle. That leaves maturing debt as a cause of default. Less than 1% of the index is scheduled to mature in 2023. Even if all of those maturity payments were missed—and we don’t think that will happen—that would still be a very mild default rate. With the bulk of maturities pushed out to 2025 and beyond, we believe it would take a severe recession to trigger high defaults.
2. What risks are top of mind?
Recession risk is a big one. We have been modeling recession scenarios and making portfolio adjustments for many months, and we believe we’re prepared. In addition, the bank loan market is looking toward the end of LIBOR, the base interest rate historically used for most floating rate contracts, in June 2023. Outstanding loan contracts have been transitioning to a new rate, SOFR, over the last year. We don’t expect this transition to cause a market disruption, but it’s something we’re closely following.
3. What opportunities in your market are you excited about as we head into 2023?