Amend-and-extend activity soared to $16.8 billion in December, the most since June, capping 2023’s total at $175.9 billion, which trounced the previous record of $110.1 billion set in 2021. Note that LCD began tracking this data in 2009.
For reference, amend-and-extend transactions allow issuers to push out their loan maturities without refinancing into a new credit, which would require marking the entire loan to market and would entail higher spreads, a new OID, etc. In return, lenders typically receive a higher applicable margin on their extended loans, and may receive additional compensation, including extension or amendment fees. This record pace of A&E deals is particularly noteworthy in the current market climate, as the average yield-to-maturity for refinancing institutional term loans via syndication in 2023 was 9.6%, an eye-watering 23-year high.
In particular, borrowers with institutional loans have been driven to seek extensions over refinancings, resulting in a staggering $82.4 billion of institutional extensions in 2023. The previous record was $40.4 billion in 2016, which is also almost the amount of institutional extensions done in 2021 and 2022 combined.
December’s amend-and-extend activity came courtesy of 17 borrowers and 22 specific transactions. Notable transactions on the institutional side include Alliant Holdings, which completed a $2.38 billion extension of its TLB-4 and TLB-5 into a TLB-6; CQP Holdco’s extension of a $2.217 billion term loan B; and NEP Group’s cross-border extension, which included a $1.062 billion term loan B. On the pro rata side, notable transactions included LGI Homes’ extension of $960 million of its revolver, Conn’s extension of its $650 million asset-based revolver, and Open Text’s extension of its $750 million revolver.
Pro rata debt typically entails amortizing TLAs and/or revolving credit facilities and is traditionally syndicated to finance companies and banks. Institutional debt consists of term loans structured specifically for institutional investors, including CLOs.
While there is heightened urgency to address near-term maturities, LCD’s data show companies that are being given extra breathing room are, by and large, not immediate default candidates. In fact, roughly 81% of amendments done in 2023 from this analysis are rated B-minus or higher at the issuer level. This compares to 76% in 2022.
The average spread increase, meanwhile, commanded by investors holding institutional term loans to extend maturities via an amendment in 2023 averaged 85 bps. Excluding double-B rated issuers, it was 104 bps.
Of course, in this higher yield environment, the need to address maturity pressure drove the heady pace of A&E activity for borrowers in 2023. On the demand side, with 2023 offering the lowest volume for new-issue supply (excluding refinancings) since 2009, investors, for the right credit story, were keen to remain invested. Furthermore, demand is fueled by the CLO investor base, where 40% of vehicles reportedly exited their reinvestment periods by the end of the year, narrowing access for refinancings.
Meanwhile, with bankruptcy filings rising, private equity portfolio companies addressed maturity burdens at a similar pace to non-sponsored companies in 2023, bucking the trend of recent years.
Maturity wall
With that, sponsored and non-sponsored companies alike with pro rata loans have chipped away mostly at 2024 maturities — extending $35.9 billion of debt due that year — along with $27.2 billion of debt maturing in 2025, $9.3 billion maturing in 2026 and $14.7 billion maturing in 2027. On the institutional side, activity last year was focused on 2025 and 2026 maturities, with borrowers extending $47.7 billion and $17.5 billion coming due in those years, respectively.
The amount outstanding in the leveraged loan market — as referenced by the Morningstar LSTA US Leveraged Loan Index — was $1.4 trillion in December, a 22% increase in market size from just five years ago.
Despite that wall of debt, leveraged loan borrowers have secured some breathing room regarding when this hefty debt load needs to be repaid. The volume of loans due through the end of 2025 narrowed to $98.1 billion by the end of December. That’s $323.4 billion less than was outstanding in this maturity bracket at the end of 2021. In fact, just $9.5 billion is due to mature before the end of 2024. The volume of loans coming due in 2028 and later, however, has grown by $409.1 billion since the end of 2021.
Meanwhile, LCD reported on four covenant-relief transactions in December. That brought the total number of covenant-relief transactions to 41 for the year, which is on par with 2022 but down significantly from 2020, when companies scrambled for flexibility at the onset of the pandemic, resulting in 193 covenant-relief transactions that year.
Of course, one of the fundamental differences in the covenant-relief landscape today is that the overwhelming majority of current covenant-relief deals are pro rata. A decade ago, covenant-relief activity tilted toward institutional issuers.
In 2010, the volume of institutional and pro rata covenant-relief activity was about $70 billion and $34 billion, respectively. Fast forward to 2020, and institutional deals accounted for just $20 billion of the $161 billion in covenant-relief volume, according to LCD. In 2023, pro rata accounted for $23.2 billion of the $26.6 billion of covenant-relief volume.
As usual, we will note that because the vast majority of the $1.4 trillion in outstanding US leveraged loans is covenant-lite (and pro rata deals are required to have covenants), it stands to reason that most of today’s covenant-relief activity is for pro rata deals.
The covenant-lite market share within the Morningstar LSTA US Leveraged Loan Index, at 89.2% in December, matched its all-time high of 89.2% in June.
Featured image by Allan Baxter/Getty Images
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