After a slow start to the year, syndicated lending to below investment grade companies finished 2016 with a bang.
A flurry of refinancing drove fourth quarter volume to $275.92 billion as issuers looked to lock in attractive financing before the Federa Reserve raises rates again. That represents anincrease of more than 50% over the year-earlier period, according to Thompson Reuters LPC.
The busy fourth quarter helped offset a slow first quarter, when concerns about rising defaults, in particulary among troubled energy companies, kept many lenders on the sidelines.
Issuance started to pick up in May and June, after energy prices stabilized and issuers sought to reprice loans at more attractive levels. It did not stop
Issuance for the year as a whole reached $875 billion, an increase of 12% over 2015.
Investor demand continued to outstrip supply, as well, raising secondary bid levels higher, the report noted.
"The market is already way more volatile than it has ever been,” an unnamed arranger told Thomson Reuters. “The market swings from ‘nothing can get done’ to ‘let’s reprice everything’ multiple times a year, not every three years.”
Most of the activity occurred in the second half of the year, with loan prices in the secondary market finishing the year averaging 101 of face value – or “the new par,” as another arranger told Thomson Reuters.
The swings were most evident for leveraged buyout loans, with the latter arranger noting that the “good market” pricing on buyout loans hovering at 500 basis points over Libor, compared to the 400 basis point level that investors and lenders are accustomed to in normally high-demand markets.
The level of demand was also evident in retail senior loan and exchange-traded funds. Investors added $5.8 billion in net new loans to their portfolios in 2016, compared to the exodus of $22 billion of loans in 2015’s sell-off.
“We have run very hard to not even stand still and cannot even (find assets to) buy in secondary,” said one investor, according to Thomson’s release.
Some investors fear a return to spread compression in January, however.
Banks took more chances on higher-leveraged loans, particularly in buyouts. The share of LBOs leveraged above 7x jumped to 21% last year, compared to 12% in 2015. That’s still down from 26% in 2014.
(Regulators’ leveraged lending guidelines cap the measure at 6x for regulated banks – showing the influence of private lenders invading the space).
The average leverage of corporate buyouts grew to 6.08 times in 2016, compared to 5.99 last year but down from 6.56x in 2014.
Primary yields for single ‘B’-rated issuers was 5.4% on average in December, rising from an 18-month low in November of 5.2%. ‘BB rated yields are at an average of 3.85%, down from 4.43% in November. But nearly “every other flex” on credit terms was either an upward flex or a widening discount due to “credit-specific” and “sector-specific” drivers, Thomson Reuters reported.
Bank of America Merrill Lynch topped the fourth-quarter U.S. league tables with 159 deals totaling $32 billion, earning a 12% share. JPMorgan, which was the top arranger for all loans including investment-grade, was second with 124 deals totaling $28.6 billion, an 11% share.
