Leveraged loan issuance in the US came in at US$900.7 billion in 2019, a 36% drop on the US$1.4 trillion of issuance recorded in 2018. New money issuance was down around 20% on the previous year.
In Europe, the market fared a bit better, finishing at US$234.3 billion (€212.4 billion) in 2019, down just 7% on the US$251.8 billion (€228.3 billion) recorded the previous year.
US dips despite demand
The US market was down even though institutional demand for leveraged loans held up. CLO issuance remained robust through periods of volatility, with new US CLO volume totaling US$118.2 billion in 2019. Although 7% down on 2018 levels, this still represented the fourth highest annual total since 2000.
Large retail outflows, however, did put a brake on overall loan appetite, with US$37 billion exiting retail funds as the Federal Reserve cut rates three times during the year.
LBO activity in the US was 18% down to US$112.3 billion, even as large LBO deals—including Nestle Skin Health and Athenahealth—cleared the market. This reflects lenders’ focus on credit quality, a 2019 trend. Investor appetite for higher rated credits saw BB issuance rise in each quarter of 2019 and surpass single-B issuance in the final three months of the year.
Refinancings sustain European issuance
While European buyouts (including LBOs, SBOs and MBOs) dropped 34% on 2018 figures to US$43.4 billion (€39.3 billion), refinancing and repricing activity fared somewhat better, finishing the year at US$105.2 billion (€95.4 billion). This was down 8% on the US$114.9 billion (€104.2 billion) total for 2018 but it remained the region’s top use of proceeds in 2019. General corporate issuance, M&A (excluding buyouts), recaps, restructuring and structured lending filled out the rest of the year’s issuance.
Although the flight to quality was not as pronounced as it was in the US, with single-B loans making up approximately 80% of rated institutional volume in Europe, investors were selective and willing to push back on terms and pricing. The Kantar and Merlin Entertainment deals, for example, both had to adjust pricing higher to secure support. Pricing also bifurcated between higher and lower rated primary loan credits.
Ba-rated loans saw pricing tighten to 298bps from 339bps, while single-Bs widened to 406bps from 397bps.
The path ahead will be slow but steady
The European and US leveraged loan markets enter 2020 with a degree of caution, as some argue that both markets could see flat deal flow and an uptick in defaults.
In the US, many portfolio managers suggest the deal pipeline is light, with some sell-side research desks predicting a drop in issuance of as much as 20%. A jumbo deal like Walgreens, however, which could come to market in 2020, would spark a huge upswing in issuance. Steady CLO issuance and hopes of a secondary market upswing could provide further support, although uncertainty heading into the US election may cancel this out.
In Europe, 2020 has started well. Notwithstanding this and the continued strong CLO demand for paper, a potentially soft M&A market points to another year of supply possibly failing to match appetite. On the plus side, maturities have been pushed out and any rise in defaults is expected to be benign.