The U.S. leveraged finance markets experienced modest recovery in the second quarter 2008 following a disastrous first quarter. According to Fitch Ratings' second quarter 'U.S. Leveraged Finance Quarterly Review,' both the leveraged loan and high yield bond markets saw an increase in new issuance and markedly higher total returns.

Investors demonstrated a higher tolerance for risk during the second quarter, indicating a sense that the market has endured the worst of the economic downturn and credit crisis. Fitch also believes that investors were moving to take advantage of perceived undervalued assets after the challenges both high yield and leveraged loan assets have suffered in the recent past.

Despite growing negative macro-economic factors including a weakening economy and amplified oil prices, investor interest returned to the leveraged loan market. During the quarter, the leveraged loan market posted its best showing since the first quarter 1993, generating a total return of 4.23% following a total return of negative 5.74%, its worst performance in history. New issuance improved with total U.S. leveraged loan issuance of $84.1 billion, up 39.2% from $60.4 billion in 1Q08. However, this was still well below historical levels due to the sharp decline of leveraged buyout (LBO) and institutional issuance as the credit crisis maintained its grip on U.S. capital markets.

Although below the year-ago level, the U.S. high yield market saw some improvement in issuance and total return in the second quarter with high yield issuance recovering to $24.9 billion from just $10.75 billion in the first quarter. Higher quality issuers and energy-related entities dominated issuance in the second quarter, following similar activity in the first quarter of this year.