Credit Markets Rally: Default Rate Slides Below 1% as Distress Lingers

In a surprising turn of events for the U.S. leveraged loan market, the default rate dropped sharply to 0.97% in June, slipping below the critical psychological 1% threshold. This decline was largely technical, driven by the rolling expiration of a major legacy default, yet underlying stress signals in the market suggest caution is still warranted.

Technical Rebound Drives Defaults Below 1%

According to the Morningstar LSTA US Leveraged Loan Index, the absence of new defaults in June provided relief to the rolling 12-month calculation. The primary catalyst for this improvement was the removal of telecom giant SFR from the legacy default list, which had previously accounted for roughly $5.65 billion in term debt.

■Default rate by amount: 0.97% (down from 1.35% in May)

■Default rate by issuer count: Ticked down to 1.34% (from 1.42%)

■Dual-track default rate: Posted a modest pullback to 2.77% (from 3.11%)

Underlying Tension: Distress Ratio Defies the Trend

Bucking the trend of improving default rates, the distress ratio for loans rose by 34 basis points to 6.87% in June. This metric, which tracks loans trading at less than 80 cents on the dollar, reversed May's decline and returned to levels seen in April, remaining just below the year-to-date peak of 7.23% recorded in March.

■The proportion of distressed loans increased, signaling lingering liquidity concerns.

■Current default levels remain consistent with the five-year (0.96%) and ten-year (1.51%) averages.

■Liability management exercises (LMEs) have plummeted to 16 issuers over the past 12 months, a significant drop from 36 in June 2025.

Forward-Looking Indicators and Market Stability

Based on the PitchBook LCD Default Predictor, the estimated six-month forward default rate stands at 1.69% by issuer count. Despite the high-interest rate environment, legacy payment defaults have remained relatively contained, ranging between 13-17 per month over the past year.

From an aviation logistics perspective, a low default environment suggests stable corporate balance sheets, potentially supporting continued investment in air freight capacity and fleet modernization. However, the creeping distress ratio serves as a prudent reminder that liquidity challenges persist for highly leveraged borrowers, which could impact future capital expenditure in the logistics sector.