The leveraged loan primary market continued to recover in the third quarter as new-issue institutional volume totaled $76 billion, the highest mark since the current cycle of Fed rate hikes began in the first quarter of 2022.
Increased issuance came as risk sentiment improved and a sustained secondary market rally lifted the weighted average bid of US leveraged loans to a 2023 peak of 95.91 on Sept. 19, the highest since May 2022 and 168 bps more than at the end of the second quarter. Investor demand as measured by CLO issuance and loan fund flows grew to $25.9 billion, from $14.9 billion in the second quarter, mainly due to positive retail fund flows after five consecutive quarters in the red. CLO issuance increased to $25.0 billion, from $22.4 billion in Q2.
Breaking total volume down by purpose, refinancings led the way for the fourth straight quarter, at $36.9 billion. That’s the third consecutive quarter featuring $30 billion or more of refinancings, which hasn’t happened since the first nine months of 2021. The $33.8 billion of non-refinancing activity marks a high since the second quarter of 2022. Repricing and amend-and-extend transactions, which don’t factor into overall new issuance data, also reflected increased market activity. Volume of these transactions was higher than at any point since the first quarter of 2021. Extension activity reached a post-Global Financial Crisis high, at $26.2 billion, up from $13.7 billion in Q2, and repricings surged to their highest level since the first quarter of 2021, at $39.9 billion. All told, primary market activity including extensions and repricings totaled $137 billion, a seven-quarter high.
Increasing overall volume was driven by LBO/M&A issuance that reached a five-quarter high of $24.5 billion. Specifically, new loans issued to support LBOs tallied $14.2 billion, representing nearly 60% of the volume. That is the third straight quarter of increasing supply in this category and the most since the second quarter of 2022, when there was $19.3 billion. Most of that was bunched in a post-Labor Day barrage led by a blowout deal for Worldpay (BB/Ba3/BB) that was increased to $5.2 billion after launching at $3.4 billion, and a $2.7 billion deal for Syneos Health (B/B1/B+) that was upsized from $2 billion. These transactions were among ten total broadly syndicated loans to finance LBOs that investors were pitched during the quarter, the most since the second quarter of 2022.
A note about that September rush — total volume of $35.1 billion was the highest monthly output since January 2022. Of that total, 61% was not related to refinancing, which was the highest share of 2023.
New LBOs have leaned toward higher ratings, including Worldpay, which carries an issuer rating profile of BB/Ba3/BB. In the year to date, 96% of the LBO volume is from issuers carrying ratings of at least B/B+, which is up from 44% in full-year 2022. In fact, there were only three LBO deals in 2023 that were from issuers rated B-minus: Cvent in Q2 and Fogo de Chão and Aramsco in Q3 (the latter, launched on Sept. 27, is not reflected in the quarter-to-date volume totals).
Total sponsored M&A — LBO plus tack-on acquisitions — rose for the third straight quarter, to $19.7 billion, the highest reading since $27.3 billion in the second quarter of 2022.
Despite the promising uptick in acquisition-related financing, the market still badly lags historical comparable periods. The $173 billion issued through Sept. 25 this year is the lowest output since 2010, when $107 billion was issued over the same period. While refinancing volume is relatively strong — only four years since the Global Financial Crisis have had more issuance over the first three quarters than the $104 billion as of Sept. 25 — non-refinancing volume is in a trough not seen since, again, 2010. In the year to date, non-refinancing volume is just $69.9 billion, versus $152 billion over the same period in 2022 and a peak of $326 billion in 2021.
With the heavy refinancing and extension activity, borrowers have collectively made progress in reducing the loan maturity wall. As it stands, 2024 institutional loan maturities have been reduced from $74.9 billion at the end of 2022 to $20.1 billion as of Sept. 22, a drop of 73%, based on the Morningstar LSTA US Leveraged Loan Index.
Most of this progress was made by higher-rated issuers; the B/B+ cohort reduced 2024 outstandings by 94%, to $1.6 billion, and the BB-minus or higher bucket dropped 97%, to less than $300 million. There was more work to do for issuers with B-minus or lower ratings, as outstandings here came down by just 57%, to $16.3 billion.
Some progress was also made, to a lesser extent, on 2025 maturities, which stood at $123 billion as of Q3, down from $198 billion on Dec. 31, 2022, a reduction of 38%. Again, while B/B+ and minimum BB-minus cohorts were down 57% and 39%, respectively, in the year to date, the B-minus bracket was reduced by only 19% and stood at $58.3 billion as of Sept. 22.
Refinancing/Recap
As mentioned, refinancings kept pace in the third quarter. Total volume over the three months through Sept. 25 is $36.9 billion, the highest quarterly figure since the $40.5 billion in the second quarter of 2021. Within this category, higher-rated issuers took up a larger share of the total compared to the two prior quarters as spreads fell to their lowest levels since 2021. This included a benchmark $5.175 billion term loan B from Restaurant Brands that was the largest single tranche issued in a refinancing, regardless of rating, since the last time the company tapped the market in 2019.
Issuance from borrowers rated BB-minus or higher came in at $17.1 billion, more than the prior two quarters combined and the most for any quarter since the first quarter of 2021. At the same time, the all-in new-issue spread for BB/BB- issuers — including the upfront fee and CSA, if any — tightened to 296 bps, the lowest it has been since January 2021 and down from 451 bps in January. At 281 bps, the straight spread was its tightest since April 2022.
For B/B+ rated issuers, the all-in spread hovered near the tights of the year at 457 bps, up slightly from 446 bps at the end of Q2 but roughly a point below 554 bps in January. The straight spread was 413 bps, off the 2023 low of 392 bps touched in May but also decidedly lower than the 453 bps to start the year in January.
Given the reduced clearing levels for new issues it’s unsurprising that pricing flexes continued to favor issuers in Q3. Indeed, in the third quarter through Sept. 25, 65 tranches had pricing tightened during syndication, while just five issues had pricing widened out. That leaned even more in borrowers' favor than Q2, when 40 deals tightened, versus 10 that were pushed wider.
The post-Labor Day rush of M&A issuance cleared out a swath of deals from the shadow calendar. Investors expected opportunistic transactions to fill the gap, which indeed is happening in the wake of Worldpay and Syneos, with repricings emerging in late September. Repricing volume in the third quarter through Sept. 25 is $41.4 billion, including $39.9 billion done via an amendment, the most the market has seen since 1Q21.
Dividend recapitalizations also picked up in Q3. Loans issued to fund a dividend to sponsors totaled $6.8 billion in the quarter, the highest level since 4Q21. Through three quarters in 2023, the total is $12 billion, more than double such issuance in 2022. While the increased activity is notable in comparison to recent periods, it's still far off the pace from peak periods. By comparison, in 2021 a whopping $73.2 billion of dividend-related volume hit the loan market, or 18% of total sponsored issuance that year. Before volume dropped off in 2022, the market averaged $35.9 billion of annual dividend-related issuance from 2015-2021.
Featured image by alice-photo/Shutterstock
This article originally appeared on PitchBook News
