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First-lien debt recovery prospect expectations have deteriorated for broadly syndicated (BSL) and middle market (MM) US corporate issuers, Fitch says in a new report.

Recovery ratings fell within Fitch’s BSL portfolio, with downgrades to RR5 and RR6 outweighing a year-on-year increase in the assignments of an RR1. The rating agency expects 38% of 2023 first-lien BSL debt to be assigned RR1, up from 36% in 2022. However, BSL instruments assigned RR5 and RR6 increased to 2.3% and 1.5%, respectively, from 1.4% and 0.2% over the same period.

“This shift correlates with capital structures containing multiple first-lien issues with differing relative priorities,” said Joshua Clark, a director at Fitch.

Over middle market issues, only 11.5% of MM first-lien debt instruments received an RR1 in 2023, down from 11.8% in 2022. Downgrades from RR1 and RR2 resulted in increased concentration in RR3 to 48% at year-end 2023, up three percentage points from the previous 12 months.

Asset-backed lending (ABL) revolvers have the highest recovery prospects among first-lien debt instrument types, with all but one ABL revolver in Fitch’s portfolio receiving an RR1 in 2023.

Fitch expects energy to have the highest recoveries in both BSL and MM, with 65% and 31% of the sector’s first-lien debt issues assigned an RR1, while food, beverage and tobacco have the lowest recoveries in MM and technology, telecommunications and diversified services have the lowest recovery prospects in the BSL market.


Peter Agra
Senior Reporter
LevFin Insights



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