The first half of 2023 has proven to be a challenging period for loan issuance across the globe, with double-digit, year-on-year declines in activity observed in all major jurisdictions.
According to Debtwire Par data, US leveraged loan issuance for the first six months of 2023 slid by a little more than a third year-on-year, falling from US$632.3 billion in H1 2022 to US$424.1 billion in H1 2023. In Western and Southern Europe, issuance over the same period was down 27.2%, dropping from US$98.1 billion to US$71.4 billion, while in APAC (excluding Japan) issuance of leveraged and non-leveraged loans fell by 43.6%, from US$196.9 billion in H1 2022 to US$111.1 billion in H1 2023.
Rising rates dampen demand
In the US and Europe, sustained high core inflation and rising interest rates have remained the biggest obstacles to a rebound in issuance, with higher rates negatively impacting appetite for floating rate-based loans.
In July, the US Federal Reserve raised its key borrowing by 0.25% to the 5.25% to 5.5% range—the highest level in 22 years.
The European Central Bank raised its main refinancing rate for the ninth consecutive time to 4.25% in July, and in the UK, the Bank of England increased its base rate for the 14th consecutive time to 5.25% in August.
Rising interest rates have pushed up borrowing costs and have curtailed borrowers’ appetite for taking on new debt or refinancing existing loans.
In the US, the average margins on first lien institutional loans have increased gradually throughout 2023, climbing from 4.1% in Q1 to 4.3% in Q2. According to Debtwire data, average margins in the US have been kept in check due to an increase in issuance from higher-rated issuers, with debt costs much higher for lower-rated credits.
However, in Europe, average margins on first lien institutional loans have eased from 4.9% in Q1 2023 to 4.6% in Q2 2023. This remains well above the sub-4% margins available to borrowers for most of 2021. When rising base rates are factored in, loan costs are more expensive than what borrowers have recently been used to, restricting the amount of debt companies can take on and service.
Flat M&A markets take their toll
In addition to the tougher pricing backdrop, overall loan issuance in the US and Europe has been impacted by a decline in issuance for buyout deals.
Buyout activity in both markets slowed considerably in H1 2023, according to Mergermarket figures. The aggregate value of all US private equity deals was down 51% year-on-year at US$155.9 billion and European activity fell 75% during the same period to US$55.2 billion.
As private equity managers contend with a slowdown in fundraising and the widening gap in vendor and buyer pricing expectations, demand for buyout financing dropped sharply in the first half of 2023, falling by 79% in the US and 64% in Europe.
Even when deals have closed, loan markets have encountered more competition from high yield bond options, which have become increasingly favored by private equity dealmakers. Their fixed rates and, in many cases, relatively cheaper pricing compared to loans have proven attractive to buyout sponsors. Apollo’s buyout of Univar and Madison Dearborn’s purchase of MoneyGram are among the high-profile private equity deals that have tapped high yield bond markets for financing in recent months.
Sluggish economies weigh on APAC
In APAC, tepid economic expansion in China has been a key reason for a decline in issuance this year.
China’s loan market has not faced the interest rate and inflationary pressures that have buffeted western markets, but its economy has also not rebounded at the pace anticipated after pandemic lockdown measures have eased at the end of 2022. Global investment banks have subsequently lowered their 2023 GDP forecasts for China.
Other key markets in the region, including India, Australia and South Korea, have been impacted by the cycle of higher inflation and rising interest rates, contributing to a decrease in issuance in the region.
Despite the tough macroeconomic backdrop, banks and investors have continued to support high-quality issuers that have come to market.
In China, stock brokerage Haitong International Securities, secured a US$2 billion loan arranged by a syndicate of banks led by ABC, while Alibaba closed an amend-and-extend loan deal worth US$4 billion. India has been another active market, bolstered by Reliance Industries and its affiliate Reliance Jio Infocomm, which have secured almost US$7.5 billion in loan financing through five syndicated loans this year.
Moving into the second half of 2023, the outlook for loan issuance remains uncertain, but there are some reasons for optimism.
US consumer price inflation has cooled to around 3%, well below the 9% peak recorded in the summer of 2022, easing the pressure on the Fed to keep raising interest rates. In Europe, headline inflation is still elevated, but is starting to cool, with UK inflation for June down to the lowest level in a year. In China, government pledges to provide a stimulus package to support domestic demand and boost the economy have been well received by the markets.
Private equity, corporates and debt players also continue to hold large amounts of cash, and there are still healthy levels of liquidity available in M&A and debt finance markets.
After a challenging 18 months, issuers and investors are hoping these dynamics will see leveraged loan markets start to turn the corner.