Leverage loan markets continue to roll | White & Case LLP

Despite surging energy prices and persistent inflation, the leveraged lending activity since the start of the year has registered substantial gains from 2020 levels

Global leveraged lending activity maintained momentum through the first half of 2021 to show steady year-over-year growth in the first three quarters of the year.

In the United States, leveraged loan issuance from the start of the year to the end of September 2021 increased 66% from 2020 figures, at US $ 1.1 trillion. In Western and Southern Europe, even though activity slowed sharply in September, the European market still posted gains of 19% over one year with emissions at US $ 254.1 billion.

Global issue in value Q1 2019 – Q3 2021

Instrument type: Leverage loans Product use: All
Site: Western and Southern Europe and United States Sectors: All sectors

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Credit activity in the Asia-Pacific (excluding Japan) (APAC) region was also healthy, with leveraged and unleveraged loan issuance up 9% year-on-year in the first three quarters of 2021, from $ 249.3 in 2020 to $ 272.3 This year.

Resilient markets despite a difficult context

The gains in leveraged lending activity are occurring despite greater macroeconomic volatility. At the end of the third quarter, the International Monetary Fund (IMF) downgraded its economic forecast for 2021, citing debt, persistent inflation and low vaccination rates in parts of the world. Soaring energy prices, lockdowns in the United States all summer due to raising the country’s debt ceiling and uncertainty in the Chinese real estate market have stoked other headwinds.

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

The boom in these transactions in the United States, particularly in the first half of 2021, resulted in a nearly doubling of leveraged loan refinancing issuance year over year, from 215.8 billion dollars in 2020 to US $ 427.1 billion in 2021.

The situation was similar 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 from year to year. And in the APAC region, issuance of leveraged and non-leveraged loans for refinancing reached US $ 160.9 billion, compared to 147.6 billion US dollars during the same period in 2020.

Dividend summary activity was also strong and was particularly robust during the first half of the year. In the United States, dividend summaries for the year through the end of Q3 2021 are US $ 40.5 billion, well above the US $ 32.9 billion issued for this purpose over the whole 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 the activity of 750 million US dollars at the end of the third quarter of 2021 was already in line with the annual total of US $ 780 million posted in 2020.

Refinancing activity, however, slowed in the third quarter as loan prices edged up and diluted the incentive to refinance earlier.

For example, the average margin on senior institutional loans in the United States fell from 3.47% in the first quarter to 3.63% in the third quarter, resulting in lower refinancing issuances in the region from 157 , 4 billion US dollar in the second quarter to 107.1 billion US dollars in the third trimester.

In Western and Southern Europe, where average margins on senior institutional loans fell from 3.71% at the start of the year to 3.86% in the third quarter, refinancing issues fell from 34.4 billion euros. dollars in the second quarter to US $ 26 billion at T3. And in the APAC region (excluding Japan), leveraged and non-leveraged loan refinancing issues followed a similar trajectory in the quarter, from US $ 64.6 billion in the second quarter to US $ 56.5 billion at T3.

Rising mergers and acquisitions increase issuance

The decline in refinancing was, however, offset by increased M&A activity this year, particularly in the United States where it reached height records and in Western Europe where it is go strong—Provide a solid platform for financing transactions.

M&A loan issuance (excluding buybacks) in the United States doubled year-over-year, from US $ 87.9 billion in the first nine months of 2020 to 174.8 billion US dollars in 2021, since the start of the year, while buyout financing operations have seen a similar increase from US $ 70.8 billion to US $ 156.3 billion during the same period. On a quarterly basis, repurchase-backed loans in the United States increased from US $ 55.5 billion in the second quarter to US $ 76.3 billion at T3.

Western and Southern Europe recorded a similar increase, with leveraged loan issuance for mergers and acquisitions (excluding buyouts) up 33% year-on-year, reaching 44 billion US dollars for the year to date. Repurchase issues, meanwhile, increased by 46% over the same period, reaching US $ 49.7 billion by the end of the third quarter.

In Asia-Pacific, leveraged and non-leveraged loan issuance for repurchases recently spiked significantly, from US $ 3.5 billion in the second quarter to 8.3 billion US dollars in Q3 — the highest quarterly total for buyback issues on By debt records.

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

CLO’s appetite for TLB debt remains intact

European issues have also benefited from a sustained appetite for term B debt (TLB) – longer-term debt tranches with little or no amortization – among investors.

According to Dealogue, the European TLB issuance for the year through the end of the third quarter was exceeded only by the record levels of activity seen in 2007. The pipeline for the fourth quarter of 2021 is equally robust, putting the European market on track to record highest annual TLB rate ever. emission.

The strength of the TLB market has been supported by demand from CLO buyers. The rise in European TLB numbers has followed the amount of capital raised by CLOs, with TLB issuers relying more than ever on CLOs for funding.

The APAC market also generated record levels of TLB issuance, reaching a record high of US $ 7.5 billion in the first nine months of 2021. TLB issuance in the region for 2021 has increased 85.4% from the US $ 4 billion recorded last year. Notable TLB deals in Asia-Pacific during this period include AEA International, the Singapore medical assistance and travel group, priced at US $ 700 million TLB. This continued in the fourth quarter, with Indian education technology company Byju’s five-year TLB of US $ 1.2 billion, which was priced in early November.

In the United States, TLB activity has also shown resilience. Healthcare company Medline Industries, for example, raised a TLB of US $ 7.8 billion as part of a US $ 14.8 billion scheme to fund its takeover by Blackstone, Carlyle and Hellman & Friedman. The deal was so far the largest prize this year in the United States.

Demand for CLOs, however, has been inflated as CLO managers clear backlogs following disruption caused by the pandemic. The current increase in TLB issuance could slow until 2022, as the CLO deployment schedules delayed by COVID-19 return to normal.

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

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