Leveraged loan default rate dips further to 0.87%; distress ratio eases

Leveraged loan default rate dips further to 0.87%; distress ratio eases

Kenny Tang

Wed, September 2, 2026 at 9:37 PM GMT+3 4 min read

The payment default rates of the Morningstar LSTA US Leveraged Loan Index (LLI) declined to 0.87% (by amount) and 1.17% (by count) in August as two companies rolled off the trailing 12-month window. There were two liability management exercises (LMEs) and one payment default during the month. The dual-track default rate (by count) at month-end was 2.88%, essentially unchanged from the 2.87% reading in July.

The distress ratio eased 39 bps to 6.50% on a broad rebound in bids, though distress remains elevated.

As of Aug. 31, the trailing 12-month default rates of the LLI were as follows:

• Payment default rate by amount: 0.87%, down from 0.93% in July

• Payment default rate by issuer count: 1.17%, down from 1.25% in July

• Dual-track default rate by issuer count: 2.88%, up one basis point from July

• Distress ratio: 6.50%, down 39 bps from July

In August, the loan default rate by amount fell by six basis points, to 0.87%, and the rate by issuer count fell by eight basis points, to 1.17%. Two issuers rolled off the legacy default list: specialty retailer Anastasia Beverly Hills and beverage maker City Brewing Company, LLC, which together accounted for roughly $1.1 billion of term debt in the LLI.

The current payment default rate (by amount) falls below the running 5-year and 10-year average monthly default rates, which have recently declined to 0.97% and 1.48%, respectively.

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 that conducted distressed LMEs contributed to the dual-track default rate, compared with 33 issuers in the twelve months through August 2025. There were two LME transactions in August while one dropped off the trailing-12-month list.

August LME transactions
Foundever Group (ClientLogic) had a $1.4 billion term loan B in the index. According to S&P Global, the company completed a restructuring of its capital structure that infused $225 million of new equity and reduced aggregate debt by about $900 million. Foundever is a global provider of customer experience management and contact center outsourcing services. With its new capital structure in place, the company is repositioning itself as an "AI-augmented provider."

Athletico Holdings LLC (Athletico Physical Therapy), which had a roughly $390 million term loan in the index, completed a restructuring transaction that equitized a substantial portion of its outstanding debt. According to S&P Global, the deal cut roughly $750 million of total debt and brought in $80 million of new capital. Athletico is a provider of physical therapy and orthopedic rehabilitation services and is sponsored by BDT Capital Partners.

The PitchBook LCD Default Predictor estimates a six-month forward default rate of 1.44% 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 on loans held in the Morningstar LSTA US Leveraged Loan Index.

While legacy payment defaults fell by one, to 13 defaults (two dropped off the trailing-12-month period while one was added), LMEs added one, to 19 (two LMEs were added in August and one dropped off the tally).

The 19 LMEs accounted for 59% of the trailing 12-month count at the end of August, down from 67% a year earlier and well below the 73% peak in July 2024.

With the addition of Athletico Physical Therapy, healthcare providers & services accounted for 5 of the 19 trailing 12-month LMEs, or 26% of the cohort. Software and IT services followed with 2 LMEs each, or 11% apiece.

The distress ratio declined by 39 bps, to 6.50% in August, as bids for loans improved broadly. The ratio remains relatively elevated, however, and indicates potential credit risk over the next six months.

In August, the ratio of loan facility downgrades to upgrades rose 14 bps, to 1.42x on a rolling three-month basis, the highest level since March when it was 1.63x. The high for 2026 came in February, at 2.21x. The ratio was as low as 1.18x in May.

Given the distress ratio has been above 6.4% for seven months running, it is likely that downgrades will continue to outpace upgrades.

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This article originally appeared on PitchBook News