In October, leveraged loans were trading below the level at which every loan in the market would have to default in order for investors to lose money. The typical recovery rate in bankruptcy is 70 cents on the dollar (according to Standard & Poor’s LCD), but US and European loan prices fell to 68% and 70% respectively in October, down from the mid-80s at the beginning of the month.
On the face of it, these levels have little to do with fundamentals and everything to do with forced unwinds.
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