Investors have been getting the jitters in the leveraged finance markets lately, with high yield bonds falling out of fashion over the prospect of successive rate hikes.

A look at the secondary side of affairs shows what's been playing out and presents a picture of what corporates issuing in the primary market can expect.

1/ The secondary market is down but not out

Since the start of the year to June 6, 2022, loans in the secondary market lost nearly four percentage points, bringing average bids down to 93.88, while high-yield bonds have seen average secondary market pricing tumble almost 11 percentage points to only 92.48.

In May alone, bonds and loans each saw secondary market bids fall approximately 350 basis points (bps), before recovering some lost ground. Investors stepped in to pick up what they consider to be bargains, particularly in the potentially oversold bond market.

2/ Most debt isn’t due to mature for a few years yet

The slump has put pressure on some issuers in the primary market, forcing new issuance to come at a higher price and keeping borrowers sidelined that would otherwise be choosing to refinance in more benign borrowing conditions.

Even with the sense of caution, the potential for default appears to be low, the majority of term loan debt currently bid at a price of 80 or lower maturing way out in 2025-2026. Only US$7.4 billion worth of loans trading at this stressed level are due in 2023, with a further US$6 billion due in 2024.

Compare this with the US$39.6 billion of paper falling due in 2025-2026. This should leave plenty of time for most companies to find a suitable way to refinance any outstanding debt before maturity.

3/ Default rates are still low—but things may tighten in the months ahead  

To date this year, default rates in the institutional loan and high yield markets both stand at 0.8%. Fitch Ratings forecasts a full-year 2022 default rate in the loan market of 1.5%, and 1% in the bond market, which ticks up to 1.5% in 2023.

Even with this anticipated slight increase in defaults, credit quality remains healthy and default volumes remain historically low despite the many market constraints.

So far, so good then—but with only one hike passed so far by the Fed and many more to come if the central bank's jawboning is to be believed, investors and corporates alike will be asking to what extent further tightening and the potential for further economic inertia have already been priced in.