Leveraged loan borrowers (price) flex their muscles
December 16, 2023
Leveraged loans
There is more evidence of increased momentum in the credit markets amid a firming 2024 interest rate picture (illustrated this week by The Fed's latest Dot Plot): leveraged loan "price flexes." As detailed in the Primer section below, spreads and fees on loans being syndicated can flex lower when investor demand dictates, reducing costs for borrowers. That's indeed the case, with as many as 10 issuer-friendly flexes over the past week, including loans for Chobani (it trimmed the borrowing spread as well as fees — more on that here), Catalent Pharma and Citadel Securities.
Whither LBOs?
Whether the market tailwind translates into sorely needed buyout activity next year is the big question, of course. Once again there was only a smattering of M&A activity during the week, and so far this year there's been a painfully thin $70 billion of syndicated loans backing M&A, versus $143 billion in 2022.
We'll have a full rundown of 2023 syndicated loan activity in next week's Credit Pitch, by the way.
Private credit
Despite cautious optimism regarding leveraged finance in 2024, there are sure to be challenges for the red-hot private credit sector as that segment grapples with Wall Street banks for speculative-grade loan business. Specifically, the recent trend of downgrades exceeding upgrades is expected to continue, according to middle market private credit research by DBRS Morningstar (more here). DBRS notes that there were fewer upgrades/ratings actions this year than in 2022, while 18% of middle market private credit ratings actions were downgrades/negative in 2023, versus only 11% a year earlier. Also in 2024: Look for more covenant-lite middle market private credit loans, DBRS says.
PC vs banks (cont'd)
Synamedia is this week's high-profile example of private credit taking out debt first originated in the bank-led loan market (more here). The UK-based video software concern lined up a $350 million unitranche loan (led by Adams Street) along with $60 million in junior notes (NorthWall Capital) and a $50 million revolving credit (PNC Bank) to replace syndicated loans stemming from the company's 2018 buyout by Permira. Of note: Early in 2022 the issuer attempted to refinance this debt in the bank-led market. That deal was shelved, as were others, due to extreme market volatility.
CLOs
After plodding through much of the year, European CLO issuance in 2023 looks like it will match levels seen in 2022, surpassing numerous unenthusiastic forecasts for the investor segment. Issuance of new CLO vehicles picked up markedly in the second half, culminating in the busiest quarter since Q1 2022, even though there has been no meaningful improvement in the CLO equity arbitrage over the past 12 months (the arb is the difference between a CLO's financing costs and the credit spread on the loans underlying a CLO).
High-yield bonds
High-grade bonds
Underscoring the impact of the Fed's pivot this week, high-grade bonds on Wednesday posted their biggest gain for a single session in more than a year, even as issuers retreat to the sidelines ahead of year-end. The S&P US Investment Grade Corporate Bond Index gained 1.22% on Wednesday, as the yield to maturity dropped 20 bps, to 5.40%, now down more than a full point from the peak October reading, at 6.43% on Oct. 19.Distressed debt/bankruptcy
If recent downgrades to the triple-C ratings rung are any indication, higher costs of debt due to Fed rate hikes are taking a toll. As many as eight loan issuers over the past week saw these downgrades, including CSC ServiceWorks (free cash flow deficit), Vialto Partners, fka PwC Mobility (earnings/cash flow) and Tosca Services (tightening liquidity/high capex). Migration to triple-C by loan issuers is of particular interest to CLOs — the largest investor in leveraged loans — as CLOs limit how much of their portfolios are meant to hold debt rated at this low level.Patent pause
A patent dispute in the high-profile pharma sector has caught the attention of event-driven investors. Bausch Health three years ago said it would spin off its eye health business into a publicly traded company, Bausch + Lomb. A competing concern, Norwich Pharma, is trying to launch a generic version of a drug Bausch has been selling, challenging the patent, and the resulting lawsuit has put the spinoff in limbo. However, some investors who believe the transaction is likely to close now view Bausch’s paper as an appealing target.
Europe
There is some optimism in Europe, as far as syndicated loans are concerned. According to LCD's just-completed leveraged finance survey, market participants think the market has turned a corner in this phase of the credit cycle, using the Morningstar European Leveraged Loan Index as one metric. Nevertheless, Street analysts generally expect a small decrease in the index by year-end 2024. We'll present the full survey in an upcoming Credit Pitch.
You can learn more about the ELLI here, and its US counterpart, the Morningstar LSTA Leveraged Loan Index, here. Each offers market-defining views and analysis of the asset class.
Tags:
Join the more than 1.5 million industry professionals who get our daily newsletter!