The middle market leveraged finance market is feeling the effects of a slowdown in M&A activity, changes in the competitive landscape and acclimation to new regulations. Average total leverage levels in the middle market dropped from just under 6.0x in the summer of 2014 to mid-5.0x today. In the overall market, deals financed above 6.0x have dropped significantly since Q3 2014.
The slowdown in middle market M&A activity has led to a significant drop in newly originated leveraged loans year over year in Q1 2015. Refinancings and dividend recaps accounted for nearly 60% of transactions closed by BMO Sponsor Finance in Q1 2015 as sponsors took advantage of a slow market to adjust capital structures. Meanwhile, many sponsors are opting for senior-only structures for ease of execution. Pricing for senior stretch deals was equal to senior/mezzanine transactions in Q1 and is now at its highest level over the last two years.
With the market on a pace to raise record amounts of CLOs in 2015, the leveraged lending market is flush with cash. Historically such an imbalance of supply and demand would lead to an increase in leverage and a corresponding decrease in pricing. But the middle market has been slow to react to the liquidity, likely due to some of the factors mentioned above. Should deal volume pick up in the second half of the year, we will be able to see which of these trends will be most influential in determining the direction of structure, pricing and leverage for the remainder of the year.
To learn more about what's behind these and other developments, contact Stephen R. Isaacs,
BMO Harris Bank Managing Director-Group Head, Sponsor Finance, at +1 (312) 461-6236 or firstname.lastname@example.org.
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