The current credit market downturn has made it considerably more difficult for underwriters to clear deals through the leveraged loan market, according to Fitch Ratings.

Fitch Ratings estimates the total amount of ‘hung’ loans remains in the range of $150-200 billion while the forward leveraged loan pipeline totals another $120 billion. Facing a diminished base of leveraged loan investors, loan arrangers have had limited success with less conventional investors such as distressed funds and newly-created loan opportunity funds, it reports.

“The number of committed deals coming to market in the near future could exacerbate an already tenuous situation,” said Eric Tutterow, managing director, Fitch Ratings U.S. Leveraged Finance. “Tight credit markets are forcing underwriters to focus more on reducing inventories rather than underwriting new loans.”

For borrowers, structural changes in the leveraged loan market have resulted in an increase in the cost of capital and reduced financial flexibility. Fitch Ratings believes this could result in rising default rates over the course of 2008. Default volume in January of 2008 was $3.7 billion, more than the amount of issuance defaulted in all of 2007.