A blemish-free December 2021 left the default rate of the S&P/LSTA Leveraged Loan Index unchanged at 0.29% by principal amount, closing out the year just 14 basis points off all-time lows of 0.15%.

To put today's level in context, the historical average default rate for the leveraged loan market is 2.82%, and the cycle peak was 4.17% in September 2020.

By issuer count, the default rate in December 2021 remained at 0.44%.

As these charts demonstrate, defaults were few and far between in 2021 compared to the heady pace of 2020. In total, just five issuers with $3.4 billion of index loans filed for bankruptcy or missed interest payments, versus 50 issuers defaulting on $45.7 billion of index loans in 2020. Issuers in 2021 were able to avoid default in 2021 thanks to strong liquidity allowing for companies to refinance and push out near-term maturities as well as back-to-back, double-digit earnings gains through the third quarter of 2021 driving cash flow and interest coverage — or the ability to service debt payments — to a new record high. Additionally, many weak balance sheets had already been restructured during the 2020 default wave.

In a read of the landscape for 2022, empirical and sentiment measures point to a quiet year for restructurings, though pockets of opportunity — from non-ESG compliant sectors to niche leisure companies such as cruise line operators and those catering to business travel — are expected to provide fodder for distressed players.

Distress and coverage ratios indicate a benign near-term landscape for leveraged loan defaults. Market distress has proven an important leading indicator for future default rates, with the exception of an isolated April 2014, $19.5 billion default by TXU. To that end, just 0.99% of index loans were priced below 80 by the end of 2021, compared to 2.17% in December 2020 and 3.75% at the end of 2019.

At the sector level, distress remains highest in broadcast radio and television, at 12.2%. With cases of the coronavirus omicron variant on the rise, leisure now has the second-highest sector level distress, with 6.5% of loans priced below 80, up from 1.6% in November 2021.

In ratings actions, upgrades of facilities in the S&P/LSTA Leveraged Loan Index outnumbered downgrades for an 11th consecutive month in December 2021, the pace increasing from 1.7x in November 2021 to 1.9x currently.

A final note on debt servicing capacity for loan issuers within the S&P/LSTA U.S. Leveraged Loan Index: Among the issuers that report results publicly, in the third quarter of 2021, the smallest-ever proportion, 9%, operated with a cash flow coverage of less than 1.5x — what is historically seen as a danger zone for the ability of companies to service debt.

Turning to sentiment measures, LCD every quarter surveys buy-side, sell-side and advisory professionals to gauge expectations for the year ahead.

Given the current low default environment and secondary market yields that remained stubbornly close to historic lows for much of 2021, valuations unsurprisingly are more of a concern to market participants than losses via restructurings.

Just 1% of respondents cited defaults and restructurings as a concern in terms of a potential impact to credit portfolios, but more than a quarter, 28%, said that they expect a market correction could happen in six to 12 months.

Again with defaults at the back of most people's minds for 2022, per LCD's polling, inflation is most likely to impact the performance of credit portfolios over the next six months, taking 21% of all responses in LCD's survey. Inflation also dominated responses at the second-quarter survey.

Despite polling after the emergence of the omicron variant, COVID-19 pandemic-related impacts rose only slightly from the midyear reading, to 13% of responses.

To gauge sentiment on the current period of ultra-benign default rates, LCD once again asked participants whether they expect leveraged loan default rates to remain below the current 1% for longer than the 13-month stretch seen following the global financial crisis.

Sentiment this time was more mixed, with 34% of respondents expecting the sub-1% default environment to last longer in this new, current cycle, versus 47% in the third-quarter reading.

Ultralow default rates following a restructuring wave is a typical cycle phenomenon, given that the weakest balance sheets are flushed from the markets and subsequent economic recovery. For reference, the loan default rate dipped below 1% in July. With more than half of respondents expecting this sub-1% default rate to last for at least 13 months from that July date, the expectation is the rate will stay below 1% until August 2022 or beyond.

And finally, respondents, on average, expect the leveraged loan default rate to increase from 0.29%, where it ended in November, to 0.91% by the end of 2022. This sentiment is nearly unchanged from the third-quarter read that called for a default rate of 0.98%.