Expected default rates on leveraged loans have fallen, although underwriting standards appear to have weakened

The default rate on leveraged loans increased rapidly early in the pandemic but has declined since last summer (figure 2-7). Additionally, downgrades of leveraged loans have slowed significantly over the same period, returning to their pre-pandemic pace. However, the share of newly issued loans to large corporations with high leverage-defined as those with ratios of debt to earnings before interest, taxes, depreciation, and amortization greater than 6-has exceeded the historical highs reached in recent years (figure 2-8).

2-7. Default Rates of Leveraged Loans

Note: The data begin in ount in default over the past 12 months divided by the total outstanding volume at the beginning of the 12?month period. The shaded bars with top caps indicate periods of business recession as defined by the National Bureau of Economic Research (NBER): , and –present. As of the publication of this report, the NBER has not declared an end to the current recession.

2-8. Distribution of Large Institutional Leveraged Loan Volumes, by Debt-to-EBITDA Ratio

Note: Volumes are for large corporations with earnings before interest, taxes, depreciation, and amortization (EBITDA) greater than $50 million and exclude existing tranches of add?ons and amendments as well as restatements with no new money. Key identifies bars in order from top to bottom.

Vulnerabilities from debt owed by small businesses have decreased, but many small businesses remain financially strained

While many small businesses closed or significantly scaled back their operations as a result of measures to contain the pandemic, credit quality for the small businesses that have continued operating or reopened has stabilized in recent months. Short-term loan delinquencies have declined notably since last summer, and long-term delinquencies have also ticked down, indicating an improvement in firms’ balance sheets. Loans extended under the PPP have provided financial support to many small businesses. Liquidity provided through the PPPLF continues to facilitate PPP lending, particularly among smaller lenders (see the box “The Paycheck Protection Program Liquidity Facility”). With pandemic-related restrictions on business operations continuing to be lifted, survey evidence suggests that a declining, though still sizable, share of small firms expect to need additional financial assistance.

Stresses on households have decreased, although some households remain vulnerable

Over the past year, an unprecedented number of households experienced significantly lower earnings due to business closures and unemployment stemming from the COVID-19 pandemic. Job losses were heavily concentrated among the most financially vulnerable, including many lower-wage workers and racial and ethnic minorities.

The financial positions of many households appear to have improved since the previous Financial Stability Report, supported by a stronger economy. Household incomes and balance sheets have also been broadly and significantly supported by fiscal programs-including the expanded unemployment insurance and direct stimulus payments in the Consolidated Appropriations Act, 2021, and the American Rescue Plan Act of 2021-and by forbearance programs that have allowed many households to delay loan payments. In the second half of 2020, aggregate household cash and checkable deposits nearly doubled from about $1.6 trillion to roughly $3 trillion, with notable increases apparent across the income distribution. Still, some households remain financially strained and more vulnerable to future shocks.

Borrowing by households has continued rising at a modest pace

Through December of last year, household debt (adjusted for general price inflation) edged higher on net. Debt owed by the roughly one-half of households with prime credit scores continued to account for almost all of the growth. By contrast, inflation-adjusted loan balances for borrowers with near-prime credit scores changed little over 2020, and balances for borrowers with subprime scores fell (figure 2-9). This decrease is largely attributable to relatively tight lending standards for such borrowers and to a decline in the share of borrowers with low credit scores, as forbearance programs http://yourloansllc.com/bad-credit-loans-me/ appear to have contributed to a noticeable upward shift in scores in the bottom of the credit score distribution.