The volume of defaults in the U.S. leveraged loan market has exceeded $10 billion in May, the busiest month for such activity since 2014, according to LCD.

Car rental concern Hertz Global Holdings Inc. on May 22 became the eighth issuer in the S&P/LSTA Loan Index to default on term debt this month, bringing the MTD total to $10.54 billion. That marks the highest monthly default total since Energy Future Holdings Corp filed for Chapter 11 in April 2014, with $19.5 billion of outstanding term debt.

The amount of defaulted U.S. leveraged loan debt over the past 12 months, at $37.4 billion, is 270% ahead of the figure one year ago, and is the highest since February 2010, according to the Index.

The default rate by amount, at 3.14%, this month surpassed its 2.85% historical average for the first time in more than five years. By issuer count, the 3.29% rate is the highest it has been since September 2010.

The U.S. leveraged loan asset class has been stubbornly default-resistant over the recent long-running credit cycle, thanks in part to "covenant-lite" loan structures, which afford debt issuers greater financial flexibility — and looser oversight from investors and lenders — and EBITDA adjustments, allowing issuers in some cases to skirt potential defaults.

As of month-end April more than 80% of the nearly $1.2 trillion in outstanding leveraged loans were cov-lite, according to LCD and the Index.

As well, lofty corporate earnings growth had buoyed many corporate debt issuers, affording them relatively comfortable cash-flow and interest-coverage ratios. That earnings growth slowed in 2019 and took a steep slide in 2020's first quarter, according to LCD, as the effects of the pandemic on the global economy began to take root.

The specter of increased default activity has put CLOs — by far the biggest investor in the leveraged loan asset class — under a particularly harsh spotlight lately. CLOs have limits on the amount of lower-rated debt they want to hold.

Hertz filed for bankruptcy protection on Friday after it was unable to reach an agreement with certain lenders on extending forbearance for the company's default under its vehicle operating master lease and related debt.

Hertz's first-lien term loan due June 2023 (L+275, 0.75% LIBOR floor) had $656 million outstanding at the time of filing, according to First Day motions filed by the company.

This analysis was written by Rachelle Kakouris, of the LCD Research group.