Leveraged loan repricings are back, but will they reach May peaks?

The window of opportunity has re-opened for speculative-grade borrowers in the post-Labor Day market. The onset of risk-off sentiment in early August and the typical late-summer lull slowed the massive leveraged loan repricing wave sweeping through the market this year. Volume fell to just $1.7 billion last month, the lowest reading since June 2023, and three repricings were forced to the sidelines.

As secondary prices recovered from a sharp sell-off, investor appetite for opportunistic offerings returned. In the first six business days of September, 19 speculative-grade companies launched amendments to lower the borrowing spread on $17.2 billion of term loans. That’s a much faster start than in July, when LCD tracked nine repricing amendments totaling $8.4 billion in the first six business days, although it trails supercharged May and June activity.

Typically, repricing activity surges when the share of performing loans priced at par or higher increases. Although this metric recovered impressively from its August dip, it failed to reach May peaks. For example, 28% of loans issued to companies rated B-minus belonged to the par-or-better cohort on Sept. 6, versus 51% in mid-May. At the higher end of the credit quality spectrum, 53% of the BB-minus rated cohort fell into the par-or-higher bucket in early September, down from nearly 80% in May.

This suggests that if market conditions remain accommodating, repricings will continue into the next quarter, but the intensity of the spring wave is unlikely to be matched. Indeed, US borrowers have already repriced $446 billion of term loans this year via an amendment process — a record pace — or $474 billion if we include a handful of re-syndicated repricings. This equates to 35% of all outstanding loans, as tracked by the Morningstar LSTA US Leveraged Loan Index.

With such a large share of the market already repriced, what is the outlook for the rest of the year?

Based on LCD’s analysis of loans tracked by the Morningstar LSTA US Leveraged Loan Index, the list of potential repricing targets in the US is still large, totaling roughly $56 billion as of Sept. 9. This cohort consists of currently outstanding first-lien term loans that (1) are outside of their prepay protection period, which is typically six months; (2) have a bid price of par or higher; and (3) have a current spread at least 25 bps higher than the three-month average for new-issue loans with the same corporate credit rating from S&P Global Ratings.

The index currently includes another $6.7 billion of loans that will exit prepayment protection periods by the end of this month, bringing the total of potential repricings to $63 billion. For reference, when LCD conducted this analysis in mid-May, the list of potential repricings exceeded $100 billion.

Another $24.6 billion of loans are currently priced between 99.75 and 99.99 with an expired prepay fee period and higher-than-average spreads for the comparable ratings categories. This cohort reflects loans that are within 25 bps of becoming potential repricing targets should new-issue clearing levels remain unchanged.

Although new-issue spreads perked up slightly from Q2 levels, they remain near multi-year lows across the credit quality spectrum. However, spread savings obtained via repricing amendments have trended lower in recent months as borrowers tackle younger vintage loans that have either been issued or repriced in 2023 or 2024. Indeed, 11 out of the 19 loans repriced so far in September were last in market earlier this year. In contrast, 56% of May repricings tackled paper originally issued (or amended) in 2023, in a higher spread environment.

As a result, the average spread savings fell to 47 bps for this month’s repricings, down from 51 bps in July and 54 bps in May, the busiest month for such activity this year. For the quarter to date, the average spread savings stands at 51 bps, down from 54 bps in the second quarter.

While a 50 bps spread cut is still the most common, its share is declining, accounting for 39% of this quarter’s amendments, down from roughly 45% in the first half of the year. At the same time, the share of deals with a 25 bps cut has increased to 30%, from roughly 27%. More notably, cuts of 100 bps or more have become very rare in the current market — LCD tracked just three borrowers that obtained such a sizable spread saving, for a 5% share. That’s down from around 10% in the first half of 2024.