Resurgent leveraged loan issuance suggests stronger year | White & Case LLP


After a deep slump in the second quarter, the issuance of leveraged loans in the US increased in the third quarter, while the European markets grew year-on-year

After the leveraged loan activities in the USA and in Western and Southern Europe weathered extreme market turmoil due to COVID-19 in the last six months, they give cause for optimism.

Achieved quarterly leveraged loan issuance in the US $ 158 billion 9% in the third quarter of 2020 compared to $ 145 billion in the second quarter.

Despite a sharp decline in the second quarter, the country’s total emissions fell less than half a percent year-over-year, from $ 632.5 billion in the first nine months of 2019 to $ 630 billion in the same period in 2020 .

And while lending in Western and Southern Europe this quarter with $ 45.1 billion– 36% less than $ 70.5 billion in the second quarter – emissions are up year over year. Issuing volume reached $ 186.3 billion in the first three quarters of 2020, compared to $ 170 billion in the first three quarters of 2019.

Lenders look beyond immediate cash needs

Leveraged loans have cope with the increasing competition from high-yield bonds for deal flow since the COVID-19 lockdown began. Many investors turned to high-yield bonds, which are not tied to floating rates and promise better returns in the current low interest rate environment.

As a result, high yield bonds have a larger share of total leveraged finance activity than in previous years. So far this year they make up in terms of value one third of total leveraged finance issues in North America and Western and Southern Europe, up from 24.7% in 2019 and 13.1% in 2018.

Despite this trend, borrowers continue to turn to leveraged loan markets – and not just to meet short-term liquidity needs, as it did in the months immediately following the COVID-19 lockdowns began.

The use of the proceeds has been expanded to include more refinancing and changes. In a market still plagued by the uncertainty posed by COVID-19, reopening funding for mergers and acquisitions and dividend increases was also encouraging.

Summaries (including transactions where at least a portion of the transaction was intended for dividend summary purposes) in value $ 13.9 billion Happened in the U.S. in the third quarter, up from a meager $ 70 million in the second quarter immediately following the pandemic – the highest quarterly summary value (including dividend summaries) since Q1 2017. A similar story played out in western and southern Europe, where summaries soared from just $ 150 million in the second quarter $ 2.5 billion in the third quarter.

Among the issuers who caught lenders’ renewed appetite for recapitalization in the U.S. was Radiate Holdco, which received a $ 4.6 billion loan and bond financing to refinance existing debt and pay a dividend to private equity -Sponsor TPG Capital. Shearer’s Foods has established a B Term Loan (TLB) of $ 1.075 billion and a second mortgage facility of $ 340 million, also to refinance debt and pay a dividend.

Loan financing for M&A (excluding buyouts) also increased in the last quarter in the US and in Western and Southern Europe $ 30.3 billion and $ 10.5 billion, versus second-quarter numbers of $ 20.7 billion and $ 5.3 billion, respectively. In the US, borrowing for buyout-backed transactions was only slightly lower in 3rd quarter 2020 compared to the second quarter of 2020.

M&A deals that have successfully secured leveraged loan financing include the purchase of PCI Pharma in a transaction that included a TLB of $ 920 million and a $ 300 million term loan -Dollars was funded. In Europe, the French nursery chain Babilou has taken out a fixed-term loan of 487 million euros for its takeover by the Antin infrastructure fund.

The fact that these M&A deals have secured funding shows that investors have an appetite for new deals – CLO managers are particularly keen to put funds into new deals. However, the flat M&A market means that the supply of new money deals for investors has been tight. As such, when dividend summaries and M&A opportunities hit the market, lenders were prepared to back them up.

Market moves back towards borrowers

Investor appetite for new business means that prices and terms have moved back in favor of borrowers after the lockdown, despite the risks posed by a second wave of COVID-19, the scaling back of financial incentives from the government and the U.S. Presidential elections arise.

Corresponding Debtwire ParAs a result, US pricing tightened in the third quarter of 2020, with the average institutional term loan margin falling to 439 basis points (bps) from 494 basis points in the second quarter. The prevalence of LIBOR floors above 0%, which guarantee lenders a minimum interest coupon when key interest rates fall, also moved more in favor of borrowers. Approximately 48% of US institutional loans in the third quarter had LIBOR floors of 1% or more, compared with 59% in the second quarter. Together, these factors contributed to institutional loan yields falling from 6.4% in the second quarter to 5.3% in the third quarter.

The rebound in investor demand after the lockdown has also supported a rebound in secondary markets after prices fell as much as 20% in March as primary trades expired. Fixed-term loans are now trading closer to pre-pandemic levels. Corresponding Debtwire Par70% of fixed-term loans were offered at 95% or more at face value in September, up from just 3% at the height of the pandemic uncertainty in March.

Outlook uncertain but optimistic

Although leveraged loan markets have rebounded in the shadow of COVID-19, lenders and borrowers are still facing headwinds. Rating downgrades remain a feature of the market, having Debtwire Par Counting 136 downgrades in the third quarter. While this is an improvement over the 452 downgrades seen in the second quarter, it is still a cause for concern. Default rates also climbed to 4.5% in September on a 12-month basis from 4.3% in August. Since the beginning of the year, payment defaults in the USA totaled 55.6 billion US dollars, with more to follow.

Still, the rebound in the third quarter suggests that leveraged loan markets have the potential to end the year much stronger than expected at the start of the pandemic.

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