After a challenging 2023, US and European leveraged loan issuance showed year-on-year gains in Q1 2024 as a more stable interest rate outlook encouraged borrowers and lenders to return to the market.
US leveraged loan issuance totaled US$365.26 billion in Q1 2024, up 76% from US$207.21 billion in Q4 2023 and a 63% increase year-on-year compared with the US$224.32 billion recorded in Q1 2023.
Loan activity in Western and Southern Europe also increased during the first three months of 2024, coming in at US$76.34 billion, which is up by just over 50% from both Q4 2023’s total of US$50.3 billion and the US$50.02 billion worth of issuance logged in Q1 2023.
However, the recovery in lending activity in Western markets stands in contrast to issuance trends in the APAC (excl. Japan) region, where ongoing distress in China’s real estate sector—combined with deflationary pressures building in China’s broader economy—have taken a toll on lending. Issuance of leveraged and non-leveraged loans in APAC (excl. Japan) came in at US$32.67 billion in Q1 2024—a 51% decrease from the US$67.25 billion recorded in Q4 2023 and a 45% decline year-on-year compared with the US$59.65 billion posted in Q1 2023.
Interest rate optimism spurs US markets
The uptick in issuance in the US has been driven predominantly by expectations that, after a series of interest rate hikes over the past 24 months, looser monetary policy is back on the agenda. As a result, a positive sentiment has returned to the US market and helped to improve pricing and risk appetite dynamics.
According to Debtwire, margins on first lien institutional loans averaged 3.57% in Q1 2024, the lowest average margins recorded in more than two years, and a notable decline from the 3.98% average margins seen in Q4 2023.
Lower pricing has brought borrowers back to the market to refinance and reprice existing loans to the tune of US$311.5 billion in Q1 2024, up 69% year-on-year from US$184.69 billion in Q1 2023. New money loan issuance has also improved, increasing by 11.8% year-on-year to US$70.9 billion in Q1 2024.
Borrowers have been further encouraged by the growing number of reverse flexes in general syndication—another sign that market conditions are improving for US issuers. In Q1 2024, Debtwire recorded 56 reverse flexes. Only the first two quarters of 2021 have seen more reverse flexes in recent years.
The first three months of 2024 also saw lenders grow more comfortable with taking risks and increasing leverage. The return to the market of lower rated single-B borrowers proved to be a major driver of higher issuance in Q1, with Debtwire logging higher leverage multiples. These averaged 4.7x for total leverage and 4.3x for net leverage in Q1 2024, versus dips to 4.5x and 3.9x respectively in H1 2023.
However, conditions have not been entirely painless for US lenders and borrowers. For example, Fitch Ratings has recorded an uptick in trailing 12-month loan default rates to 3.79%, the second highest default rate since the 2008 banking crisis, with only the initial pandemic period in 2020 coming in higher at 4.5%. Moreover, expectations that 2024 could see a major series of rate cuts have also been tempered; the Federal Reserve has signaled that it wants to be totally sure that inflation is under control before cutting rates.
Europe tracks US trends…with some exceptions
Similar to the US, hopes that interest rates have peaked also supported gains in the European leveraged loan markets.
As the interest rate outlook has settled, financing costs have come down, with average margins on first lien institutional loans for Q1 2024 coming in at 4.26%. This marked the sixth consecutive quarter of margins falling. As in the US, borrowers have also benefitted from an increasing number of reverse flexes in syndication processes. In Q1 2024, Debtwire recorded 12 reverse flexes, the highest number since the first three months of 2021.
The more benign market for borrowers has sparked a surge in refinancing activity, which totaled US$44.85 billion in Q1 2024, a 79.8% increase from the US$24.94 billion worth of refinancing issuance in Q1 2023. Borrowers have not only been able to raise financing at a lower cost but they have also secured higher leverage multiples, which have recovered to 5.2x for total leverage and 4.7x for net leverage—near their averages over the past decade—after remaining depressed since a dip in H2 2022.
Although the European market has moved in alignment with the US in some areas, it has diverged in others. For example, new money issuance only accounted for 10% of total leveraged loan issuance in Europe in Q1 2024 and, despite gains in overall issuance, new money activity in that period fell by 63.48% year-on-year, according to Debtwire.
On the upside for European issuers, another point of divergence from the US market could be the pace of rate cuts, with lower inflation in Europe expected to provide the European Central Bank more room than the Federal Reserve to reduce rates at a faster pace.
Headwinds persist for APAC issuers
In APAC (excl. Japan), issuers and lenders have been waiting for macroeconomic conditions to improve, which has caused issuance activity to subside.
China’s real estate industry—the dominant sector for loan issuance historically—has remained stressed, with S&P Global noting that demand for new properties in China has remained muted despite government stimulus packages. Moreover, developers are still contending with high debt levels and constrained cash flows and liquidity.
However, steady economic growth in other APAC economies, notably India, Vietnam and the Philippines, will help to soften the landing from slower than anticipated issuance in China. Nonetheless, China has the largest share of loan issuance activity in the region, and investors and borrowers are hoping for an improvement in Chinese lending conditions to truly reignite the APAC market.