Long-Run Relationship between Default Rates and Macroeconomic Variables in the U.S. Leveraged Loan Market

Abstract

This article examines and ascertains a long-run relationship of leveraged loan defaults rates and macroeconomic variables in the United States. It identifies factors in the economic environment that have a significant impact on the development of leveraged loans. The author uses a vector error correcting model to elaborate the interdependencies among industrial production, credit spreads, differences between credit and leveraged loan spreads, the stock market, and the number of defaults of the S&P Leveraged Loan Index. The time series is based on 156 months between January 1999 and December 2011. Credit spreads, differences in loan and bond spreads, and the stock market have a positive impact on default rates, whereas industrial production shows a negative sign. All factor variables are highly significant aside from the stock market.

TOPICS: Fixed income and structured finance, risk management