A blowout year for the US leveraged loan market in 2021 will be a tough act to follow after multiple issuance records were shattered. Market forecasters see activity pulling back from the peaks seen this year, but at the same time volume is expected to remain strong in 2022.
To recap, institutional loan issuance in 2021 reached $615 billion, crushing the prior annual record of $503 billion set in 2017. Activity was broad-based, with M&A and opportunistic issuance in the form of dividend recapitalizations, in particular, standing out, setting new highs.
Market prognosticators expect strong issuance again in 2022, yet not at the chart-busting levels, with sustained M&A volume at the vanguard. For example, analysts at Barclays see new loan supply at $480 billion to $500 billion, while Morgan Stanley’s estimate is more robust at $570 billion to $600 billion, as is Citi’s estimate of $600 billion. By BofA Global Research’s estimation, new-money issuance will drop to $500 billion and repricing volume will add another $250 billion to gross issuance.
According to J.P. Morgan’s 2022 outlook, net issuance, excluding repricing and refinancing activity, will fall by less than 10%, to $350 billion. However, the firm is calling for a 20% year-over-year rise in gross issuance, to $1 trillion, fueled by issuers refinancing and repricing loans to transition away from Libor.
Such forecasts are predicated in part on the continuation of a strong technical underpinning of the floating-rate asset class, particularly given the expected rising rate environment after the Federal Reserve signaled three rate hikes in 2022 at the Dec. 15 FOMC meeting. The CLO market will also be coming off a spectacular year, with a record-setting $185.2 billion of issuance, 44% more than the prior high of $129 billion from 2018. Inflows into loan mutual funds and ETFs contributed another $32.4 billion of capital to the market in 2021, through Dec. 15, based on Lipper’s weekly reporters only. Both channels of demand are expected to remain supportive in 2022.
CLO issuance is expected to remain strong in 2022, market watchers say, pointing to a healthy deal pipeline. CLOs are the largest investors in leveraged loans, taking a roughly 74% share of the new-issue market as of September 2021, the highest rate ever, according to LCD. BofA, for one, projects $155 billion in new-issue CLOs as well as $229 billion in refinancing/reset activity in 2022. That said, CLO issuance may be slow to start in the new year as managers and investors work out the transition to Sofr from Libor. As LCD has noted, some managers may have pulled some of their new-year business forward into the fourth quarter, helping propel the market to another quarterly CLO issuance record of $55 billion.
There are mixed views from bank research desks regarding the amount of refinancing and repricing activity the market might see next year, but most agree that solid economic conditions, not to mention a mountain of dry powder at private equity funds, will lead to continued strength in acquisition-related activity. Favorable market conditions for issuers may also continue the trend of dividend deals.
While the Street consensus seems to be that leveraged loan issuance will remain robust in 2022, there are risks that add some degree of uncertainty, including the Libor transition and the impact of coronavirus variants such as omicron.
This analysis was updated on Jan. 3, 2022, to reflect full-year 2021 US loan issuance.
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