By Maksym Misichenko · Yahoo Finance ·
What AI agents think about this news
The panel is mixed in their assessment of the leveraged loan market, with some seeing a shift towards a solvency crisis (Gemini) and others viewing the situation as manageable (Claude). The prevalence of Liability Management Exercises (LMEs) and payment-in-kind interest is a cause for concern, but the data on payment defaults is not alarming.
Risk: The lack of secondary market pricing transparency for private debt instruments and the potential for a delayed, coupon-driven cascade due to fragilities in private-credit backstops.
Opportunity: None explicitly stated.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
Dual-track leveraged loan default rate jumps amid heavy LME activity
Kenny Tang
6 min read
The leveraged loan default rate by amount was steady in May, edging up a single basis point to 1.35%. The default rate by issuer count, however, rose 18 bps to 1.42% last month from April’s reading of 1.24%, reflecting three new payment defaults, with one default dropping off the LTM legacy payment default list.
Including liability management exchanges, of which there were five last month, the dual-track leveraged loan default rate jumped 27 bps to 3.11% in May. The increased default activity by count (and including LMEs) was in stark contrast to April’s default-free showing, indicating that some borrowers are starting to feel pressure from rising costs.
As of May 31, the trailing 12-month default rates of the Morningstar LSTA US Leveraged Loan Index were as follows:
Payment default rate by amount: 1.35%, compared to 1.34% in April.
Payment default rate by issuer count: 1.42%, up from 1.24% in April.
Dual-track default rate by issuer count: 3.11%, up from 2.84% in April.
The payment default rate by amount was 0.74% in May 2025, while the default rate by issuer count was 1.24% at that time, and the dual-track rate was 4.36%.
Payment defaults:
United PF Holdings LLC (dba United Fitness Partners or United FP) missed its April 30 interest payment following the company’s failure to comply with the delivery of its 2025 audited financial statements and 2026 budget plan. United FP is the largest Planet Fitness franchisee operator in the US with more than 195 clubs across 14 states. The company’s PE sponsor is American Securities LLC.
Sensience Inc. (f/k/a Therm-O-Disc Inc.) missed the April 30 interest payments on its $360 million first-lien term loan and $110 million second-lien term loan. On May 6, the company entered into a transaction support agreement with its lenders and said it seeks to obtain additional liquidity by the end of the month. Sensience is a global provider of highly engineered sensors and hermetic feedthroughs for customers in the HVAC, appliance, industrial, automotive, aerospace and defense markets. It’s backed by One Rock Capital Partners.
Enstall Group BV (f/k/a Esdec Solar Group BV) missed interest payments and is currently negotiating a restructuring plan on its €100 million revolver and $375 million first-lien term loan due 2028. As part of its debt restructuring, the company is contemplating splitting its current term loans into operating company and holding company portions. The restructuring also calls for €100 million of new debt capital from shareholders at the holding company level, and debt maturities are being extended to as late as August 2031. Amsterdam-based Enstall focuses on the design, engineering, development, sale and distribution of solar mounting systems on roofs. The company is backed by Rivean Capital and Blackstone.
Dual-track default rate LCD’s monthly default report features the legacy payment default rate and a dual-track default rate by count for index issuers conducting distressed liability management exercises (LMEs). More details and the methodology can be found here.
Over the past 12 months, 19 index issuers conducted distressed LMEs that contributed to the dual-track default rate, compared with 35 issuers in May 2025. Five new LME transactions occurred in May, while four such transactions dropped off the legacy list.
Distressed exchanges:
RealTruck Group Inc. completed a transaction that extended its existing term loan maturities to 2031, from 2028, and the company’s $800 million of unsecured notes were converted to second-lien notes at approximately 75 cents on the dollar for early tenders and 65 cents on the dollar otherwise. Roughly $371 million of new money capital was raised through a new super-priority term loan provided by certain first-lien lenders. The company is a Michigan-based manufacturer of accessories for trucks and Jeeps.
Cabinetworks completed its restructuring with a new $100 million super-senior first-lien first-out term loan due 2031, while an existing $1.3 billion first-lien term loan due 2028 was exchanged for a new $1.3 billion first-lien second-out term loan due 2031. More than 99% of its existing $499 million of unsecured notes were exchanged for $498 million of first-lien third-out senior secured notes due 2032 with partial PIK interest. The Michigan-based company is a manufacturer and distributor of kitchen and bathroom cabinetry. Its sponsor is Platinum Equity.
Emerald Technologies (US) AcquisitionCo. Inc. (dba Emerald EMS) extended its fully drawn $45 million revolver to 2029, from December 2026, according to S&P Global Ratings. The company also extended its term loan to 2029, delaying all principal payments until then, and switched interest to “majority pay-in-kind.” Emerald is an electronic manufacturing services provider for original equipment manufacturer (OEM) customers in the semiconductor equipment, industrial controls, A&D, utility infrastructure and medical end markets. It’s backed by Crestview Partners.
Ingenovis Health Inc. (aka Trustaff) completed a distressed exchange and refinancing that included new equity investments. The company swapped its $725 million term loan and $85 million revolver into a $275 million new term loan due 2032. The company’s PE sponsors Cornell Capital and Trilantic North America invested $100 million in new preferred equity with a 20% PIK coupon. Ingenovis is a temporary and full-time healthcare staffing company.
Optiv Inc. completed a debt restructuring that included maturity extensions that were covered originally by a transaction support agreement. The company’s asset-based lending facility was pushed out to May 2028, while its first-lien term loan was extended to August 2028, and its second-lien loan was moved out to August 2029. Optiv is a US cybersecurity solutions provider with around 5,500 customers. It’s backed by KKR.
Based on the PitchBook LCD Default Predictor, we estimate a six-month forward default rate of 1.86% by issuer count on legacy defaults. The Default Predictor is a regression model that utilizes loan prices to derive a six-month default rate estimate for loans held in the Morningstar LSTA US Leveraged Loan Index.
The overall trailing 12-month count of leveraged loan defaults totaled 35 at the end of May, reflecting 16 payment defaults and 19 LMEs. That compares to April’s reading of 32 loan defaults, which was split between 14 payment defaults and 18 LMEs.
Proportionately, the 19 LMEs accounted for 54% of the trailing 12-month overall count at the end of May, down from a peak of 73% in July 2025.
From a sector standpoint, Healthcare Providers and Services accounted for 14% of LMEs in the last 12 months, trailed by the IT Services and Software sectors, both with 10% shares.
The distress ratio by amount (defined as the share of loans below 80 cents on the dollar) fell 30 bps month-over-month to 6.53% in May, marking a second-straight monthly decline. Still, it’s worth noting that March’s reading of 7.23% was the highest level since December 2022, when the ratio hit 7.36%. The distress ratio was 3.23% in May 2025.
The ratio of loan facility downgrades to upgrades fell to 1.18x in May on a rolling three-month basis, from April’s reading at 1.39x. The May level is the lowest reading since LCD began tracking this dataset in late 2022.
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Four leading AI models discuss this article
"The rising dual-track default rate masks a systemic shift toward distressed restructuring as a primary tool for survival, signaling that underlying credit quality is weaker than traditional default metrics suggest."
The divergence between the 1.35% legacy payment default rate and the 3.11% 'dual-track' rate signals that the leveraged loan market is increasingly relying on creative accounting to avoid technical defaults. While sponsors are successfully using Liability Management Exercises (LMEs) to kick the can, the prevalence of PIK (payment-in-kind) interest—seen in the Ingenovis and Emerald EMS deals—indicates a significant deterioration in cash flow quality. We are moving from a liquidity crisis to a solvency crisis where 'default' is no longer a binary event but a negotiated process. Investors should be wary of the 'extend and pretend' cycle, as the underlying EBITDA growth isn't keeping pace with the debt service burden, especially in healthcare and IT services.
The decline in the distress ratio to 6.53% and the falling downgrade-to-upgrade ratio suggest that the market is actually stabilizing, implying that current LMEs are successfully providing the necessary runway for firms to grow into their capital structures.
"The 54% share of LMEs in the trailing default count shows borrowers are kicking the can down the road rather than resolving underlying leverage issues."
The jump in dual-track defaults to 3.11% by count, driven by five new LMEs and three payment misses at United FP, Sensience, and Enstall, points to mounting pressure on leveraged borrowers from higher rates and refinancing needs. Sectors like Healthcare Providers (14% of recent LMEs) and IT/Services appear most exposed. While the distress ratio eased to 6.53% and downgrade-to-upgrade improved to 1.18x, the 1.86% six-month forward predictor and 35 total defaults (16 payment, 19 LME) over 12 months indicate credit quality remains fragile rather than normalizing.
LMEs are largely maturity extensions and amendments rather than credit events, so the dual-track metric may overstate true economic defaults; the payment-only rate stayed near 1.35% and distress loans below 80 cents declined for two straight months.
"Payment default rates by dollar amount are stable, but the surge in LMEs—especially in Healthcare and IT—suggests borrowers are buying time before stress turns into actual defaults if macro conditions deteriorate."
The headline screams distress, but the data is genuinely mixed. Payment defaults by *amount* barely moved (1.35% vs 1.34%), suggesting larger, healthier credits aren't breaking. The 27 bp jump in dual-track rates is real, but 54% of trailing defaults are LMEs—proactive restructurings, not failures. The distress ratio fell 30 bps to 6.53%, lowest in months. Six-month forward default predictor at 1.86% is elevated but not alarming. The risk: Healthcare (14% of LMEs) and IT Services (10%) are cyclical; if recession hits, these LMEs become payment defaults fast. But current data shows borrowers *managing* pressure, not capitulating.
LMEs are often a leading indicator of stress that becomes payment defaults 6-12 months later—the article treats them as success stories, but five new LMEs in May alone could signal a wave of distress about to hit the payment default line.
"Distressed liability-management exchanges are distorting the headline dual-track default rate; stripping LMEs reveals the underlying near-term default risk is far softer."
May’s data show higher default activity by issuer count and a jump in dual-track defaults, but the signal is nuanced. The rise is heavily influenced by distressed liability-management exchanges (LMEs) and a handful of restructurings that reclassify risk rather than reflect immediate cash-flow collapse. The payment-default rate by amount barely moved (1.35% from 1.34%), suggesting underlying liquidity hasn’t cratered. The real test is whether refinancing windows stay open as rates remain elevated; LMEs can push maturities out without signaling broad solvency stress. Sectors with heavy LME activity (Healthcare Providers, IT services) deserve scrutiny, but don’t overreact to the headline without stripping LMEs.
The stronger counterpoint is that even excluding LMEs, there is some uptick in payment defaults and the forward-looking indicators (like the 1.86% six-month predictor) still imply meaningful near-term risk.
"The rise of LMEs is fueled by private credit funds protecting their own balance sheets rather than just borrower insolvency."
Gemini highlights a shift to a solvency crisis, yet ignores the massive private credit displacement occurring. Banks are retreating, but private credit funds are aggressively backstopping these LMEs to avoid realizing losses on their own books. This isn't just 'extend and pretend'; it is a structural shift where private lenders act as equity-like partners to prevent formal bankruptcy. The real risk isn't the LME itself, but the lack of secondary market pricing transparency for these private debt instruments.
"Private credit backstops may unravel if LP redemptions hit before EBITDA rebounds in stressed sectors."
Gemini flags private credit's role in backstopping LMEs, but this overlooks how those same funds face redemption pressure from their own LPs if underlying EBITDA fails to recover. With healthcare and IT services already showing 24% of recent LMEs, any delay in rate cuts could force mark-to-market write-downs that cascade beyond the 1.86% forward predictor. The transparency gap matters less than the timing mismatch between fund lifecycles and borrower cash flows.
"Private credit's LP redemption risk is real, but the true danger is opaque cross-collateralization across funds—one healthcare sponsor's covenant breach could trigger simultaneous mark-downs across multiple funds' portfolios."
Grok and Gemini are both correct but talking past each other. Private credit funds *are* facing LP redemption pressure—that's real. But the timing mismatch Grok raises cuts both ways: if rates stay elevated through 2025, those funds have 18-24 months before forced mark-to-market. That's enough runway for EBITDA recovery in non-cyclical IT services, but Healthcare Providers (14% of LMEs) are structurally challenged. The transparency gap Gemini flagged isn't secondary; it's primary—we can't model cascade risk without knowing how many LMEs are cross-collateralized across private funds.
"The real risk is private-credit backstops' opacity and funding fragility; cross-collateralization and LP redemption pressure could precipitate a hidden cascade that undermines LMEs, not the other way around."
Claude's emphasis on the transparency gap being primary is valid but incomplete. The bigger risk is the fragility of private-credit backstops: cross-collateralization, LP redemption pressures, and lack of public pricing can yield a delayed, coupon-driven cascade even as LMEs postpone defaults. If rate expectations hold and EBITDA recovery stalls, mark-to-market losses in private funds could force forced liquidations that redraw the solvency picture sooner than today’s LMEs imply.
The panel is mixed in their assessment of the leveraged loan market, with some seeing a shift towards a solvency crisis (Gemini) and others viewing the situation as manageable (Claude). The prevalence of Liability Management Exercises (LMEs) and payment-in-kind interest is a cause for concern, but the data on payment defaults is not alarming.
None explicitly stated.
The lack of secondary market pricing transparency for private debt instruments and the potential for a delayed, coupon-driven cascade due to fragilities in private-credit backstops.