COMPANIES have issued a record US$986 billion of debt in the US leveraged loan market this year, mostly to cut interest expense on existing debt.
That figure surpassed 2017 as the busiest year for new issuance, according to Bloomberg-compiled data going back to 2013. Most of this year’s volume has come from companies refinancing current obligations or locking in lower margins through repricing.
The type of deals getting done underscores a painful market dynamic for investors: too much leveraged loan demand and not enough supply of new debt for uses like buyout financing.
Issuers are able to slash margins anywhere from a quarter to three-fourths of a percentage point as lenders are more willing to take the cut given a dearth of opportunities to fund acquisitions. Those that don’t agree to such deals risk getting rolled out as others keen to put their money to work join in.
For such investors, it can be difficult to replace a repriced loan in their portfolio with one that offers a decent yield and sufficient credit quality.
“There’s an element of frustration of like ‘didn’t this just get repriced?,’” said Grant Nachman, founder and chief investment officer of Shorecliff Asset Management. “If issuers take it too tight, you have to work that much harder to find something to replace it with. There’s really no substitute for hard work.”
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Borrowers, on the other hand, are taking advantage of healthy secondary trading levels – which have recovered to 97 cents on the US dollar – to get better terms on their loans.
Software company UKG on Thursday (Oct 24) repriced a US$6.3 billion loan, the largest such transaction of the year. Market-making firm Citadel Securities just finalised a US$4 billion repricing. Fertitta Entertainment, the holding company for businesses of American billionaire Tilman Fertitta, has started syndicating a US$3.6 billion deal.
Demand has been boosted by a surge in creations of collateralized loan obligations, the biggest buyers of leveraged loans. Issuance of CLOs, which repackage loans into bonds, is up 69 per cent on a year-over-year basis.
Despite the strong new issuance volume, the focus on refinancings and repricings has left the size of the US leveraged loan market unchanged at around US$1.4 trillion, according to the Morningstar LSTA US Leveraged Loan Index.
This year, “new money” transactions like buyout financing – which boost the size of the leveraged loan market – have only made up about 10 per cent of total volume.
That’s changing. In September, almost 20 per cent of issuance volume came from acquisition-related transactions. The momentum has continued this month. Currently in syndication is a US$3.3 billion leveraged loan package to help support the buyout of R1 RCM, which helps hospitals with billing and payment functions.
More could be on the way in 2025 as the Federal Reserve is expected to continue lowering interest rates, potentially spurring acquisition activity.
“We don’t have a tonne of conviction about a big spike in leveraged buyout supply in the rest of this year, particularly with the election coming up,” said Corry Short, a credit strategist at Barclays. “But could we see it pick up in 2025? Sure.” BLOOMBERG
