In the News

• Although investors and other market participants are continuing to be selective, the U.S. loan market saw noted improvement in November, with a slight uptick in primary loan issuance due in large part to refinancing activity. In the syndicated loan market, pricing flex favored borrowers in November with no price increases and 15 cuts and the average clearing spread on new single-B rated loans dropped to S+564 (from S+728 in October). LBO activity remained scarce in November with just one broadly syndicated buyout announced in November for Nielsen Holdings. For a deeper dive into different segments of the middle market, this Covenant Review Middle Market TrendLines Data Report covers metrics and deal terms for the LTM period ended 10/31/2022.
• Despite this slight thaw in the debt markets, creditors remain hesitant to buy into new deals for borrowers that do not have higher quality ratings. As a result, arrangers have scrapped or withdrawn planned syndications and have had to hold buyout loans on their balance sheets. As of November 28, 2022, Bloomberg estimates banks in the U.S. and Europe are holding approximately $42 billion in such “hung” debt—debt that in many cases was underwritten before the market tightened and which arrangers are keen to shift off of their books before year end.
• Arrangers have had some success offloading their LBO debt in the recent market thaw, albeit at a steep discount. This trend has opened the door to flexible financial buyers, who have purchased loans to their portfolio companies in order to take advantage of the increased yield on such debt.
• The Federal Reserve Bank raised its benchmark interest rate by another 50 bps yesterday, bringing the total to a range of 4.25% - 4.5%. Although this marks a smaller increase than the four 75 bp increases prior, the Federal Reserve projects that it will continue raising rates into 2023, likely to a peak level between 5.0% and 5.5%.
• As companies brace for a potential downturn, many are looking to obtain or expand capacity on revolving credit facilities to provide a cushion in the event liquidity becomes an issue, much like the activity we saw at the beginning of the pandemic. Likewise, although new issuances in the syndicated term loan market remain low, companies have had some success closing amend-and-extend transactions, particularly in the pro rata space involving Term Loan A and revolving facilities. Private Equity funds have also been turning to net-asset-value (NAV) loans—which allow sponsors to borrow against the equity value in their portfolio companies—as a source of liquidity at this time when more conventional loans are difficult to obtain on favorable terms.
• Volatility in the leveraged loan market is in turn creating stress in the collateralized loan obligation (CLO) market, with valuations for CLO debt already down significantly for the year with further drops expected. In addition, investors are bracing for the impact of anticipated additional defaults and downgrades, particularly for low-rated companies in the consumer goods, healthcare and entertainment industries.
• The long-awaited 2022 Uniform Commercial Code (UCC) Amendments, which add a new Article 12 providing a framework for commercial transactions involving virtual currencies, distributed ledger technologies and other tech developments (including details on how to perfect a security interest in such collateral), have been published and are now being sent to the states for adoption. The Uniform Law Commission has a tracker on its website for where the amendments have been introduced into state legislatures and where they have been enacted.

Goodwin Insights

In the inaugural edition of Debt Download, we covered recent trends in the U.S. debt finance markets. This month, we take a look at what’s happening in the U.K. and Europe.

• Conditions in the U.K./European debt markets remain in their challenging post-summer mode with many investors risk off until the end of the calendar year (as has been the case for most of Q3 and Q4). Some smaller and middle market deals are still getting done, but more “creativity” and “flexibility” for both sponsors and lenders are the watch words in this space.
• Activity is very muted in the broadly syndicated loan market and the high yield bond market, driven by fundamentals and a lack of CLO issuance, as European CLO new issuances are reportedly down almost 35% year-to-date.
• Earlier today, the Bank of England and the European Central Bank raised interest rates by another 50 bps.
• With an eye on 2023, bankers will be looking to place deals for credits with maturities running up in 2024 and 2025 – there is speculation that the market might resurrect the “forward start facilities”, which became briefly popular during the financial crisis as a way of locking in committed financings ahead of maturity.
• There is generally no consensus view on the trajectory of the leveraged loan market in 2023 given the stressed macro environment (including persistent inflation in the Eurozone and the U.K.). Optimists will point to lots of dry powder at credit funds and other institutional investors – only time will tell.

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