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Loan shrinkflation: deal sizes contract amid rising pricing

In the last issue of DebtDynamics EMEA, we explored factors relating to the few deals that had managed to price in the past five months following the most recent wave of heightened volatility in capital markets. This included the main sectors of those borrowers that had braved the market and the use of deal proceeds. In this issue, we look at the premiums that firms are now having to pay after the movement in pricing since the start of the year.

As the number of deals braving the market has fallen, less-common double-B rated deals have failed to make an appearance in recent months. Meanwhile, the pricing on single-B facilities continues to rise to an average of over 500 basis points (bps), nearing levels last seen in 2020.

Fewer deals, smaller sizes

Significantly smaller deal sizes have reached the market since March, with a high proportion of loans issued as add-ons at sizes under EUR 250m. These add-ons are being brought to tide over financing for firms during this difficult period in financial markets. The add-on structure means deals use the same documentation as the underlying facility, thus helping speed loans through syndication.

Interestingly, some deals have struggled lately because of their smaller size, and therefore lack of liquidity, which, combined with poor performances in the secondary market, is making primary syndication unattractive. Firms coming to market with larger facilities would be able to avoid this issue of demand; however, most are unwilling to issue significant amounts of debt given the discount they would have to provide to get the deal over the line.

Large deals that have made their way to market in recent months have performed well. Both a EUR 3.4bn multi-currency term loan B (TLB) from Refresco and a EUR 600m TLB from MKS
Instruments tightened pricing from launch, while Clinigen’s EUR 735m TLB priced within guidance. However, with outflows from funds and a slow rate of new euro collateralised loan obligations (CLOs) pricing, there is currently less capacity in the markets to cater for these larger deals.

Sequential price increases

Pricing has shot up in the past few months. Comparing pricing on deals allocated over the past five months with a company’s previous facility reveals two things. First, that pricing has increased materially since February – even surpassing 2020’s peak on a company-by-company basis – and second, that firms are still willing to enter the market, meaning those companies that have issued do not expect the environment to improve in the near future.

Overall, smaller deal sizes are getting through for well-known firms in non-cyclical industries such as healthcare and consumer staples. While larger deal sizes are also getting through, few firms are willing to raise large amounts of capital at a relative increase in cost from just a few months ago.