Plodding revival: loan markets prop up quarterly volumes as HY issuances tone down

Leveraged finance (LevFin) issuance across the US and European institutional loan and high-yield (HY) bond markets rose 26% year-on-year (YoY) to USD 466bn in the first nine months of 2023. Although issuance bounced back from the lows of last year as market conditions improved and spreads tightened, in the absence of a meaningful mergers & acquisitions (M&A)/leveraged buyout (LBO) pipeline, LevFin volumes still lagged well behind historical levels.

With a limited supply of new money paper, refinancing and amendment-and-extension (A&E) transactions accounted for the bulk of activity this year. More opportunistic deals such as dividend recaps and loan repricing exercises also resurfaced in the third quarter as borrowers sought to take advantage of strong investor demand and tighter clearing yields.

A total of USD 174bn was transacted across institutional loans and HY bonds in 3Q23, representing an 11% increase from the previous quarter. The largest boost to volumes came from the US leveraged loan market where activity accelerated in August, while the European loan and HY bond markets also regained momentum in September.

US institutional loan issuance jumped 50% from the previous quarter, churning in USD 112bn across 135 transactions in 3Q23. Strong technical bid spurred an uptick in the August and September deal flow, with over USD 40bn transacted in each month. In total, USD 259bn was allocated in 9M23, representing a 14% YoY increase but falling 61% short on the 9M21 volume.

The US high-yield bond market made a strong comeback from last year as issuance climbed 41% YoY to USD 112bn across 140 deals in 9M23. However, compared with the era of cheap interest rates, this year’s volume accounts for barely one-third of USD 346bn transacted in 9M21. During 2023, issuance peaked in the second quarter at USD 45bn, but as activity subsided in July and August, 3Q23 volume fell to USD 32bn.

In Europe, HY bond issuance resurrected from last year’s slump, rising 64% YoY to USD 37bn across 84 transactions in 9M23. April and May were the busiest months, with USD 16bn netted in the second quarter. However, as activity died out during the summer holidays, issuance softened to USD 11bn in the third quarter.

The European institutional loan market hauled in USD 58bn across 105 deals in 9M23, posting a 38% YoY rise. At USD 20bn, 3Q23 issuance was on par with the previous quarter as the explosion of activity in the second half of September made up for the traditionally quieter August.

Price compression: new issue clearing yields slide down

As CLO activity picked up pace in the third quarter, investor demand for loan paper led to an uptick in margin flex-downs and tighter original issue discounts (OIDs), while some borrowers also managed to shave 25bps-50bps off existing loan margins. In the US, the weighted average margin on new loans dropped to 395 basis points (bps) in 3Q23 from 468bps in 2Q23, while in Europe it stood at 465bps, slightly above 458bps in 2Q23 but tighter than 493bps in 1Q23.

In the primary HY bond market, weighted average yields on new issues in the US and Europe reached 8.9% in 3Q23, falling well below 9.8% at end of 2022. However, the levels rose slightly above the 2Q23 average of 8.6%. Despite fund outflows in the third quarter, deals also often priced tighter than initial talk as bond investors still had cash to deploy.

The summer rally: technical bid buoys secondary loan prices

Secondary loan markets rallied in the third quarter supported by a technical bid from ramping CLO vehicles amid a shortage of primary loan supply. Weighted average loan bids peaked at 94.67 in the US and 93.83 in Europe towards September-end, before retreating to 93.82 and 92.70 at quarter-end. Despite the latest softening, loan prices in the US and Europe are considerably tighter compared with 91.52 and 88.60 at the start of the year.

In the US secondary HY bond market, weighed average yields descended to 8.04% in mid-July from 8.35% at June-end but subsequently reversed course and rose to 8.85% by September-end as cautiousness set in after the Federal Reserve signaled a higher-for-longer approach to interest rates. In Europe, secondary HY yields fell to a low point of 7.05% at July-end but climbed back up to 7.28% at the end of 3Q23.

Primary drivers: maturity extensions continue to dominate

Refinancing and maturity extensions continued to dominated activity in the LevFin markets, while M&A and LBO financing continued to shrink as new deal creations remained slow.

With USD 98bn raised in the US, M&A/LBO financing accounted for 25% of the 9M23 HY bond and institutional loan issuance. At the same time, refinancing, repayments and recaps amounted to USD 245bn, or 64% of the total, while proceeds for general corporate purposes (GCP) made up the remaining 11% of the volume.

At USD 62bn, refinancing, repayments and recaps also accounted for 64% of the total European LevFin issuance this year. Meanwhile, only USD 16bn was raised to fund M&A/LBO transactions, or merely 17% of the total, while GCP proceeds represented 18%.

Ramping up: CLO machines steam ahead

CLO issuances picked up pace in the third quarter following an earlier slowdown, churning out USD 23.6bn in the US and EUR 6.1bn in Europe. Liability costs continued to tighten during the quarter, with triples A tranches achieving spreads of sub-170bps on new US CLOs and around 170bps in Europe.

In 9M23, new CLO issues totalled USD 79.5bn in the US and EUR 17.8bn in Europe, down 27% and 11% YoY, respectively. In the US, refinancing and resets amounted to USD 8.4bn after resurfacing in the second half of the year. There were no reissues on either side of the Atlantic thus far this year.

Popular sectors: US technology and European chemicals top the charts

The computers & electronics sector continued to top the LevFin charts in the US, hauling in USD 62bn in 9M23, while oil & gas and chemicals followed with USD 31bn and USD 27bn, respectively. The financial sector and professional services trailed with USD 25bn each.

In Europe, professional services joined chemicals in the top spot with USD 12bn raised in each sector in the past nine months. Computers & electronics followed with USD 10bn, while leisure & recreation punched in USD 9bn, and the telecom sector generated USD 6bn.