A promising start to the new year for the leveraged loan primary market was derailed in March as heightened recession fears and a banking crisis left markets on edge. Total institutional new-issue volume in the first quarter is $49.5 billion, up from $35.7 billion in Q4. Still, it’s the lightest output for any first quarter since 2016, and it’s down sharply from the $112.3 billion posted in the first quarter of 2022.
Following a challenging 2022, leveraged loan issuers filed into the primary market with opportunistic transactions that addressed approaching debt maturities. However, the constructive tone unraveled in March with the sudden onset of bank troubles that sent shockwaves through risk markets and agitated concerns over an economic downturn. Morningstar data showed that the persistent outflows from loan mutual funds and ETFs spiked in the wake of the Silicon Valley Bank collapse in early March. The $1.9 billion net outflow for the week ended March 22 was the largest in nine months, and followed another large outflow in the prior week, at $1.6 billion, bringing the year-to-date outflow to $7.4 billion.
The reaction was reflected by volatility in the secondary loan market. Following the fall of Silicon Valley Bank, the Morningstar LSTA US Leveraged Loan Index on March 13 fell 0.76%, its second largest single-day decline since April 2020. Two days later the index fell another 0.54%. After hitting a 2023 high of 94.71 on Feb. 9, a 2.27-point gain from 92.44 at the end of 2022, the average bid of the index had fallen to 92.59 by March 24.
Refinancing accounted for the lion’s share of total supply in the first quarter, at 70%, with M&A a distant second at 19%. By dollar volume, the $34.5 billion attributed to refinancing activity was the most for any quarter since Q2 2021 as borrowers utilized the reopening market to manage debt maturities. Notably, the window of opportunity in the first quarter allowed more lower-rated issuers to tackle maturities in 2024 and 2025.
Whereas refinancing in the fourth quarter had largely come from double-B rated borrowers, the mix was weighted toward single-Bs this time. In Q1, $23.5 billion of the refinancing total came from single-B issuers for a 68% share, while double-B volume was $6.7 billion (19%). That flipped the script from the prior quarter when double-B issuance was 60% of the total and single-Bs made up 27%.
In addition to the refinancing was another $18.6 billion of amend-and-extend activity (which technically does not count toward refinancing volume), showing that borrowers in Q1 were able to put a solid dent in upcoming institutional loan maturities. That A&E volume was the most since Q3 2016 and topped the volume of institutional amend-and-extend transactions for all of 2022. The surge was largely shaped by benchmark term loans for Altice France ($4.26 billion), Sedgwick ($3.5 billion), and TransDigm ($4.56 billion), accounting for 66% of the extended loan total.
This has helped chip away at the maturity wall of outstanding institutional term loans. Since the start of the year, there has been a $24.7 billion reduction of loans maturing in 2024, to $51.6 billion as of March 17. The amount of loans coming due in 2025 has fallen by $27.7 billion over the same period, to $173.5 billion. Notably, 66% of loans that are due in 2024 carry ratings of B-minus or below, and 39% fell into the triple-C bracket as of March 17. That portends a continuation of extension activity in the year ahead as lenders work with borrowers to give them more runway.
LBO volume remained stuck in a rut following the market disruption in 2022 that curtailed acquisition activity and stranded some existing financing commitments with underwriting banks: The $5.5 billion combined total of new LBO volume from the fourth quarter and first quarter thus far marks the lowest for consecutive quarters in 13 years (since Q4 2009-Q1 2010). However, green shoots appeared in the barren pipeline late in the first quarter, with a flurry of announcements, including take-private buyouts of Qualtrics and Cvent and large M&A deals for Solenis and Vistra Corp. The continuing tussle between the broadly syndicated and private credit markets remained evident with financing for a widely reported jumbo buyout in the works for Cotiviti, traditionally an institutional loan issuer, in play with a direct lender group.
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