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Loan Highlights 1H23: Running aground

Loan volumes fall on hard times in 1H23

The global loan market endured a bleak first half of the year, with the overall 1H23 volume falling 28% year-on-year (YoY) to USD 1.9trn, the lowest showing since 2012. Macroeconomic conditions remained challenging, with news flow suggesting that the US and European economies faced a tough outlook amid persistent inflation and tightening monetary policies. Nevertheless, Asia-Pacific recorded the largest decline in loan activity in 1H23 when compared with previous years, despite being the region with the fastest economic growth.

While loan volumes in the Americas and EMEA fared relatively well amid unprecedented central bank interest rate hikes, a US recession would put a further dampener on global loan activity. However, the consensus forecast on the start and depth of the recession has been continually shifting, with expectations leaning towards a soft landing.

APAC loans reached a volume of USD 280bn in the first half of 2023, representing a 36% YoY decline and the lowest year-to-date (YTD) value since 2009. Meanwhile, volumes in the Americas and EMEA were each down at a more moderate rate of 27% versus 1H22, posting totals of USD 1.2trn and USD 469bn, respectively. In the US and Europe, a rise in amend-and-extend transactions and short-term refinancing bolstered issuance levels, with issuers kicking the proverbial can down the road. However, these deals were largely being refinanced with higher margins or with wide original issue discounts (OIDs), leaving interest coverage ratios worse off than prior to their refinancing.

While the figures for the first half of the year show anaemic loan volume results, the quarterly values unfortunately paint an even bleaker picture, with global 2Q23 volumes down 40% from last year’s respective value. Although lending activity in the second quarter usually tends to surpass that of the first quarter each year, 2Q23 volumes were also down 10% when compared with 1Q23. This was most pronounced in Asia-Pacific, where the loan volume in 2Q23 fell 42% versus 1Q23 and more than halved compared with the second quarter of 2022.

Refinancing dominates global issuance

Refinancing has dominated the narrative of the global loan markets so far in 2023, with the trend intensifying in the second quarter as almost 70% of the total volume across the loan markets was raised purely to refinance existing debt. At the same time, M&A-related financing including LBO transactions represented just 10% of the total at USD 93bn.

Interestingly, the rise in refinancing comes at a time when interest rates climbed to their highest point in recent years across both EMEA and the Americas. While in the past borrowers typically flocked to refinance debt at more favourable costs, fears of worsening credit conditions have been driving an increasing number of issuers to address their loan maturities well ahead of the usual timeframe although with shorter-term extensions.

Loan tenors drop globally in 1H23, with Americas leading the trend

The surge in refinancing and the prevalence of shorter-term loan extensions resulted in a drop of the overall tenor of loans issued in 1H23. In the Americas, the average tenor shrank to under 3.9 years – the lowest value since 2009. Loans issued in EMEA followed a similar trend, dropping to the lowest point since 2020 at 5.6 years, while APAC loans remained near the historical average tenor of around five years.

Significant debt maturities loom

The increase in refinancing and A&E transactions in the Americas and EMEA and the shortening of tenors resulted in a large impending debt maturity wall, with global loan volume of approximately USD 1.5trn due each year from 2024 to 2027. Despite having a lower volume of total loans, next year the APAC region will have more loan debt – at USD 484bn – maturing than EMEA. Following 2024, the maturity wall reverts back to the prevailing trend with EMEA having more debt coming due each year.

ESG declines amid heightened volatility

ESG-linked loan issuance suffered in 1H23 amid harsh credit conditions. While in previous years ESG had continued to grow as a percentage of overall issuance despite fluctuating loan volume, 2023 has so far marked the first year of decline in this value to 9% from 12% reached in 2022. The most significant decline stems from the Americas, where ESG issuance dropped to just 5% of the total loan volume.

ESG financing dropped to 18% of loans issued in EMEA, though the region retained the top spot in nominal terms, with USD 82bn raised in 1H23. Meanwhile, ESG issuance as a percentage of the total volume had the softest decline in the APAC region. In fact, the number of ESG deals transacted in Asia-Pacific this year was three times the number in the Americas, though the average size of each deal was much smaller.