Middle Market Debt Markets Show Little Concern for Credit Risk

Valvoline and DraftKings made significant moves in the middle market debt space this week, signaling that lenders are not as concerned about credit risk as they once were.

On August 24, Valvoline amended its Second Amended and Restated Credit Agreement to increase availability under its revolving credit facility from $475 million to $600 million, reduce pricing, extend the maturity five years to August 2031, and raise the maximum consolidated net leverage ratio permitted under the financial covenant.

The Federal Reserve took note of these developments. Speaking at Jackson Hole on Friday, August 28, Chair Kevin Warsh observed that 'credit spreads on corporate bonds and leveraged loans are near the low ends of their historical ranges,' adding that 'banks report commercial and industrial lending standards...on the easier end of their historical range.'

Warsh's comments led to a significant shift in market expectations. Futures repriced violently, with odds of a quarter-point increase at the September 15-16 meeting rising to roughly 57 percent from about 35 percent the prior day.