Leveraged loan markets have been buffeted by a challenging macroeconomic backdrop and cautious investor sentiment in Q3 2022, with year-on-year issuance sliding across all major jurisdictions.
In the US, leveraged loan issuance dipped to US$207 billion—down 31% year-on-year and the lowest quarter since Q3 2020. Issuance for the year to date has reached US$842.6 billion, down from US$1.1 trillion during the same period in 2021.
It’s been the same story in most markets this quarter. In Western and Southern Europe, leveraged loan issuance hit US$44.9 billion in Q3—up 39% on Q2, but still the second lowest quarter on Debtwire Par record going back to Q2 2016. To date, there has been US$135.1 billion in issuance in the region, half the 2021 year-on-year total.
In APAC (excl. Japan), leveraged loan and non-leveraged loan issuance dropped to US$56 billion in Q3, its lowest quarterly level since Q4 2015, according to Debtwire Par. The region has seen US$248.9 billion in total issuance in 2022, down from US$292.6 billion year-on-year.
What’s causing this slowdown and what can the markets expect for the rest of the year?
Rate rises hit hard
Hopes that rising inflation had peaked in the US and Europe in the summer, and that the pace of interest rate hikes would ease, failed to materialize. Inflation remained stubbornly high across all Western markets, providing little room for central banks to maneuver, and leaving the door open for further rate hikes in the coming months.
In September, the US Federal Reserve raised benchmark interest rates by a further 0.75% to 3.25%, in November the Fed bumped the rate to 4%, and it may well raise the rate yet again in December, all to keep inflation—running at its highest levels since the 1980s—in check. European and UK central bankers have been similarly hawkish, raising rates in early November, as has the Bank of England.
As interest rates have climbed, so have financing costs. In the US, the weighted average margin on institutional loans climbed to 4.73% in Q3 2022 from 4.34% in Q2 2022, according to Debtwire Par. At the beginning of the year pricing was sitting at under 4%. European debt costs have also jumped, climbing from 4.08% in Q1 2022 to 5.29% in Q3.
In addition to paying higher interest rates, borrowers have also had to offer increasingly generous original issue discounts (OIDs) to get lenders onboard. Climbing OIDs in the US and Europe have seen weighted average yields from Q2 to Q3 widen from 6% to 8.9% in the US and from 5.5% to 8% in Europe, according to data from Debtwire Par.
In APAC (excl. Japan), inflationary pressures have been less pronounced with inflation in the region’s largest economy, China, running at around 2.5%. This well below the levels observed in the US and Europe and The People’s Bank of China has been able to trim key interest rates and keep borrowing costs stable.
M&A keeps market moving
Rising debt costs have made opportunistic refinancing less attractive for borrowers, while investors have seen more value in the secondary market, where opportunities have opened up to buy loans at deep discounts to par.
In the US, refinancing, repricing and amendments dropped from US$233.1 billion in Q2 2022 to US$116.3 billion Q3 2022—this represents a 22% drop, year-to-date, from US$608.2 billion in the first nine months of 2021 to US$475.2 billion during the same period in 2022.
Refinancing, repricing and amendments in Western and Southern Europe have also contracted, despite a slight quarterly uptick in Q3 2022. Thus far in 2022, they have reached US$57.2 billion, down from US$134.46 billion year-on-year.
With refinancing ebbing, the US market has relied on M&A and buyout activity to keep issuance ticking over—though, once again, issuance has been slow when compared to the previous year’s frenetic activity. Issuance for M&A (excl LBOs) stands at US$133.9 billion in 2022, down from US$168.51 billion in the first nine months of 2021. Buyout activity dipped only slightly during the same period, from US$134.1 billion to US$129.2 billion.
Among the largest deals in the US, Clayton Dubilier & Rice financed its US$2.8 billion purchase of KAH Hospice with a US$1.6 billion term loan B and Corporation Service Company raised a US$1.25 billion term loan B to price to fund its acquisition of Intertrust.
It’s been a very different situation for investors in Western and Southern Europe, particularly for M&A activity, with issuance for 2022 (excl. LBOs) down more than 80% year-on-year, from US$54.7 billion to US$9.9 billion. Buyout activity in the region has been far more stable, dipping slightly from US$53.71 billion to US$42.4 billion year-on-year.
Despite this relatively steady flow of buyout issuance, macro-economic instability made large syndications more challenging in Q3, as seen with the financing of the buyout of Citrix.
Steady APAC market goes from strength to strength
While it has also seen a downturn in issuance this quarter, the APAC (excluding Japan) loan market, while smaller than its US and European counterparts, has proven relatively stable through the course of 2022.
The jurisdiction is a bank-led market where lenders usually hold debt to maturity, have more covenants in place and take lower yields. This more conservative approach has helped to shield the market from much of the economic volatility being experienced right now and supported a 40% year-on-year increase in loan issuance for sponsor-backed buyouts, according to Bloomberg.
Deal highlights include the provision of a close to US$1 billion loan to finance Blackstone’s acquisition of Singapore-based precision engineer Interplex and a funding package for CVC’s US$350 million buyout of gaming group Razer.