Leveraged loan markets keep on rolling

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White & Case LLPDespite a spike in energy prices and persistent inflation, year-to-date leveraged loan activity showed substantial gains on 2020 levels

Global leveraged loan activity sustained momentum built up through H1 2021 to post steady year-on-year growth over the first three quarters of the year.

In the US, year-to-date leveraged loan issuance through the end of September 2021 was up 66% over 2020 figures, at US$1.1 trillion. In Western and Southern Europe, although activity tailed off sharply in September, the European market still showed gains of 19% year-on-year with issuance coming in at US$254.1 billion.

Overall Issuance by value Q1 2019 – Q3 2021

Instrument type: Leveraged loans Use of proceeds: All
Location: Western and Southern Europe and USA Sectors: All Sectors

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Loan activity in the Asia-Pacific region (excl. Japan) (APAC) was also healthy, with leveraged and non-leveraged loan issuance up 9% year-on-year over the first three quarters of 2021, from US$249.3 in 2020 to US$272.3 this year.

Markets resilient despite challenging backdrop

The gains in leveraged loan activity come despite wider macro-economic volatility. At the end of Q3, the International Monetary Fund (IMF) revised its economic forecasts for 2021 downward, citing indebtedness, persistent inflation and low vaccination rates in some parts of the world. Surging energy prices, deadlocks in the US through the summer over raising the country’s debt ceiling and uncertainty in China’s real estate market fanned further headwinds.

While third quarter loan issuance cooled somewhat, loan markets remained active. Refinancing was the main driver, with activity through the first half of the year particularly frenetic, as issuers took advantage of attractive pricing to lock in lower rates and extend maturities.

The surge in these deals in the US, especially during the first half of 2021, resulted in leveraged loan refinancing issuance almost doubling year-on-year, from US$215.8 billion in 2020 to US$427.1 billion in 2021.

It was a similar picture in Western and Southern Europe, where refinancing increased from US$43.7 billion in the first nine months of 2020 to US$95.1 billion in 2021 year-on-year. And in APAC, year-to-date leveraged and non-leveraged loan issuance for refinancing reached US$160.9 billion, up from US$147.6 billion during the same period in 2020.

Dividend recap activity was also steady and was especially robust during the first half of the year. In the US, dividend recaps for the year to the end of Q3 2021 came in at US$40.5 billion, well above the US$32.9 billion issued for this purpose in all of 2020.

In Western and Southern Europe, dividend recaps reached US$5.7 billion in the first nine months of the year—more than double the US$2.6 billion seen in 2020.

And in APAC, recap activity of US$750 million to the end of Q3 2021 was already in line with the full year total of US$780 million posted in 2020.

Refinancing activity, however, slowed through the third quarter as loan pricing edged higher and diluted the incentive to refinance early.

For example, the average margin on first lien institutional loans in the US climbed from 3.47% in Q1 to 3.63% in Q3, prompting refinancing issuance in the region to drop from US$157.4 billion in the second quarter to US$107.1 billion in the third quarter.

In Western and Southern Europe, where average margins on first lien institutional loans rose from 3.71% at the start of the year to 3.86% by Q3, refinancing issuance fell from US$34.4 billion in Q2 to US$26 billion in Q3. And in APAC (excl. Japan), leveraged and non-leveraged loan refinancing issuance followed a similar path through the quarter, slipping from US$64.6 billion in Q2 to US$56.5 billion in Q3.

M&A surge lifts issuance

The dip in refinancing, however, was countered by climbing M&A activity this year—especially in the US where it reached record heights and in Western Europe where it is going strong—providing a solid platform for financing deals.

M&A (excl. buyouts) loan issuance in the US doubled year-on-year—from US$87.9 billion in the first nine months of 2020 to US$174.8 billion in 2021, year-to-date—while buyout financing deals saw a similar surge, rising from US$70.8 billion to US$156.3 billion during the same period. On a quarterly basis, loans backing US buyouts rose from US$55.5 billion in Q2 to US$76.3 billion in Q3.

Western and Southern Europe observed a similar uptick, with leveraged loan issuance intended for M&A (excl. buyouts) up 33% year-on-year, reaching US$44 billion for the year to date. Buyout issuance, meanwhile, grew by 46% in the same period, to US$49.7 billion by the end of Q3.

In APAC, leveraged and non-leveraged loan issuance intended for buyouts has lately seen a significant spike, jumping from US$3.5 billion in Q2 to US$8.3 billion in Q3—the highest quarterly total for buyout issuance on Debtwire Par records.

M&A (excl. buyouts) issuance in the region, however, showed a very different picture, dropping year-on-year from US$30.8 billion in the first nine months of 2020 to US$18.7 billion in the same period this year.

CLO appetite for TLB debt undiminished

European issuance also benefitted from sustained appetite for term loan B (TLB) debt—longer-term debt tranches with little or no amortization—among investors.

According to Dealogic, European TLB issuance for the year to the end of Q3 was second only to the record levels of activity observed in 2007. The pipeline for Q4 2021 is equally robust, putting the European market on track to record its highest-ever rate of annual TLB issuance.

The strength of the TLB market has been underpinned by demand from CLO buyers. The rise in European TLB figures has tracked the amount of capital raised by CLOs, with TLB issuers relying on CLOs for financing more than ever.

The market in APAC also generated record levels of TLB issuance, climbing to an all-time high of US$7.5 billion in just the first nine months of 2021. Year-on-year TLB issuance in the region for 2021 was up 85.4% on the US$4 billion recorded last year. Notable TLB deals in APAC during this period include AEA International, the Singaporean medical and travel assistance group pricing a US$700 million TLB. This continued into Q4, with India-based education-technology company Byju’s US$1.2 billion five-year TLB, priced in early November.

In the US, TLB activity has proven resilient too. Healthcare company Medline Industries, for example, raised a US$7.8 billion TLB as part of a US$14.8 billion package to fund its buyout by Blackstone, Carlyle and Hellman & Friedman. The deal was so far the largest to price this year in the US.

Demand from CLOs, however, has been inflated as CLO managers clear backlogs following the disruption caused by the pandemic. The current uplift in TLB issuance could cool moving into 2022 as CLO deployment schedules delayed by COVID-19 revert to normal.

The potential for tighter monetary policy and increasing competition from alternatives to TLB financing—including direct lending and high yield bonds—could also put pressure on TLB issuance in the year ahead. For now, however, appetite is holding firm.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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