Institutional loan and HY bond issuance more than triples YoY despite lack of M&A & LBO financing

Leveraged finance (LevFin) issuance across the US and European institutional loan and high-yield (HY) bond markets totalled USD 460bn in the first quarter of 2024, representing a 230% year-on-year (YoY) jump.

An improved macroeconomic picture at the start of the year and the prospect of interest rate cuts revived investor appetite for risk, fostering greater liquidity across LevFin markets and tighter credit spreads. High-yield bond and retail loan funds continued to attract inflows during the quarter, while a surge in new CLO issues also fuelled demand for paper. Favourable market technical spurred a wave of loan repricing activity, while both loan and HY issuers took the opportunity to address upcoming maturities as the cost of issuing debt contracted.

Yet new money supply remained well below historic levels despite the willingness of bank underwriters and the LevFin markets to fund mergers & acquisitions (M&A) and leveraged buyouts (LBOs). A gap in buyer and seller valuations and the cost of capital continued to hinder a meaningful revival in dealmaking.

Competition from private credit funds for the already limited M&A/LBO deal supply continued to be a factor, with private equity sponsors often practicing a dual-track approach before securing financing. Whereas direct lenders can offer certainty of execution and higher leverage than bank underwriters, syndicated markets have become increasingly more attractive in terms of pricing.

Borrowers that had raised financing from direct lenders during more volatile conditions in 2022 and 2023 have started returning to the syndicated markets to refinance their more expensive private credit debt. With the traditional loan and bond markets again looking like cheaper financing options, the trend is set to continue.

Armed with large caches of dry powder ready for deployment, private credit funds will not give up the fight for debt assets. Syndicated market players, however, expect to see direct lenders take on a more complementary role in the future, supplementing senior-secured financing with junior debt such as PIK instruments.