Institutional leveraged loan issuance managed a modest bounce in the fourth quarter to $35 billion, from $21.9 billion in the third quarter, as the market tone stabilized after four straight quarterly declines in volume. While the backlog of LBO debt dominated headlines, it was refinancing activity that drove issuance amid the fourth-quarter thaw as issuers used the window of opportunity to address near-term maturities.
Much of the institutional issuance in the quarter took place in November (at $21.6 billion, the busiest month since April) amid an improving secondary market. The Morningstar LSTA US Leveraged Loan Index returned a combined 2.28% over October and November after a tumultuous September. Gains were initially led by the BB category, and single-Bs followed suit, except for B-minus names that lagged in the rally. By mid-November, the average bid price of the index had risen to 93.06, after starting the quarter at 91.94. That was followed by a generally stable market into December.
While up quarter-over-quarter, the still-modest new-issue volume cemented 2022 as one of the slowest years on record. The market heads into year-end with $225.1 billion in the books, a 12-year low and a 63% decline from the all-time high in 2021 of $614.6 billion.
Refinancing volume jumped to $21.3 billion in the fourth quarter, the highest since 4Q21. This was driven in large part by higher-rated borrowers stepping in to push out maturities of existing TLB paper coming due in 2023 through 2025. In fact, the share of all refinancing transactions in Q4 from BB rated issuers, at 60%, was the highest since 4Q19. Examples here include such benchmark issues as Axalta Coating Systems (BB/Ba3; $2 billion), GoDaddy (BB/Ba2; $1.77 billion), and Focus Financial Partners (BB-/Ba3; $1.76 billion).
Amend-and-extend activity, which does not factor into volume totals, was also up in the quarter. Through these amendments, a total of $13.4 billion of institutional term loans were extended in the quarter, the most since 1Q21.
The late refinancing push helped chip away at the loan maturity wall, but there is still more work to be done considering the meager deal flow in 2022.
Consider that the fourth-quarter refinancing total of $21.3 billion was more than the prior two quarters combined ($15.9 billion), highlighting the primary market hiatus through the middle of the year. Total refinancing volume in 2022 of $58.4 billion is the lightest since 2015, when there was just $49.6 billion.
Despite heavier refinancing volume in prior years — 2021 featured a whopping $178.5 billion — the amount of institutional loans coming due in the next two to three years is more than at any other year-end period on record. Within two years $96.3 billion is due to mature, although only $10.5 billion of that is in 2023. However, extending that maturity horizon out to three years, the amount coming due jumps to $298 billion. For some perspective on that figure, at the end of 2021 there was roughly $177 billion due to mature within the three-year time horizon, and at the time it represented a record high in that metric.
As higher-quality issuers dominated the landscape with opportunistic transactions in Q4, M&A deals and those from borrowers at the lower rungs of the credit scale were marginalized. Total M&A volume of $12.8 billion was the lowest output since the second quarter of 2010, and just a fraction of the five-year quarterly average of $53 billion. Further underscoring the tilt toward high quality, two double-B deals represented 37% of that M&A total — for BB+/Ba2 rated Open Text ($3.585 billion) and BB/Ba1 rated Entain ($1 billion).
In all, 50% of new-issue volume during the quarter was from companies rated BB-minus or higher. It was a tough slog for borrowers with at least one B-minus equivalent rating, which represented 20% of the total. Some historical perspective on those numbers: the BB-minus or higher share is the highest since the Global Financial Crisis, and the B-minus share slumped to its lowest level in five years.
Away from refinancing and high-rated M&A, LBO volume slowed to a trickle at $2.1 billion, its lowest level since 1Q10. It was the third straight quarterly decline from $40.7 billion in Q1, reflecting a hot start to the market in January before the wheels came off. By comparison, buyout activity backed by private credit remained brisk in the fourth quarter, including in the core middle market. An emerging theme in 2022 has been private lenders stepping in to support large LBOs amid disruption in the broadly syndicated market. That was evident still in Q4 as direct lender groups provided financing commitments for the $8 billion take-private of Coupa Software and the $4.6 billion LBO of KnowBe4, among others.
Aside from the market for LBOs, sponsored issuance of any kind in the fourth quarter slumped to its lowest level since 3Q09.
As for pricing, new-issue spreads for B/B+ rated borrowers continued to decline after peaking in July at 510 bps. By December, the average had dropped to 429 bps, marking the fifth consecutive month of declines. The average yield for that cohort proved more stubborn, a reflection of deeply discounted OIDs and rising benchmark interest rates, but turned downward in December to 9.79%, from a post-GFC high of 10.09% in November.
For B/B+ rated borrowers, new-issue prices had stretched to the lower 90s over the summer, but in the fourth quarter there have been no deals below 94 (and three that printed at that level).
In another sign of a thawing primary market, pricing flexes over the past three months leaned heavily in favor of issuers. During the quarter 27 deals had terms tightened ahead of pricing, while in just one case was pricing forced wider.
As the institutional primary market gathered pace in Q4, the pro rata market slackened compared to prior periods. Pro rata volume in Q4 hit a two-year low of $23.3 billion. That’s down from $57.2 billion in Q3 and an all-time high of $74.7 billion in Q2. That said, even with an uptick of institutional refinancing, there were still cases of borrowers turning to the pro rata market to repay existing term loan B debt, such as Evertec and Sterling Check. Others issued TLAs alongside new TLBs in refinancing efforts, including Citco Group, Focus Financial, and Formula One. With the slower pro rata market, total loan supply during Q4 of $58.3 billion was the lowest output since 3Q11, and down from $79.1 billion in Q3.
Featured image by Travis Wolfe/Shutterstock
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