The US leveraged finance market posted strong year-on-year gains in 2021 as pandemic-related restrictions were eased and high levels of market liquidity fueled a surge in issuance.
Loan activity drove this uptick in issuance, rising more than 60% year-on-year—from US$861.7 billion in 2020 to US$1.4 trillion in 2021, according to Debtwire Par.
Loan refinancings and repricings and new money deals both enjoyed significant gains, with the former up year-on-year from US$414.4 billion in 2020 to US$758.3 billion, while new money activity rose from US$358.1 billion to US$564.5 billion during the same period.
Attractive pricing drives refinancing
Drivers of issuance activity pivoted in 2021, with refinancing and repricing loans dominating the first half of the year and accounting for more than half of overall annual issuance in the US and deal-linked M&A financing activity building in the second half of the year.
In 2021, almost two-thirds of US refinancing and repricing occurred in H1, as borrowers rushed to take advantage of attractive pricing and refinance pricier debt taken on following the waves of COVID-19 lockdowns. In Q1 2021, for example, when refinancing and repricing came in at US$287.3 billion, the average margin on first lien institutional loans was only 3.47% versus margins of 4.17% and 4.24% in Q4 2020 and Q3 2020, respectively.
Refinancing and repricing received an additional lift as COVID-19 restrictions were relaxed during the year—before the Omicron variant arrived. The market opened up to borrowers in sectors directly impacted by lockdowns, including leisure and travel. Borrowers in these sectors were able to refinance at significantly lower rates than those that were available in 2020. Cruise line operator Carnival, for example, issued a US$1.8 billion loan in the spring of 2021, priced at 3% over LIBOR. A year earlier, the company was paying a margin of 7.5% on its borrowings.
Deal-linked issuance picks up pace
As pricing increased during the year, opportunistic refinancing and repricing activity tapered off. Overall momentum, however, was sustained by major upticks in issuance intended for M&A and buyouts. M&A debt issuance, excluding LBOs, almost doubled year-on-year, reaching US$249.6 million in 2021, while buyout issuance climbed from US$121.9 billion in 2020 to US$203.6 billion, year-on-year.
Corporate and private equity dealmakers drove the surge in deal-linked issuance as they actively pursued deals delayed due to the pandemic and deployed the record sums of cash and dry powder at their disposal.
With refinancing and repricing activity slowing, lender appetite shifted to financing jumbo deals, such as the US$30 million buyout of US medical equipment business Medline by private equity firms Blackstone, Carlyle and Hellman & Friedman. The deal was the largest leveraged buyout in a decade and raised US$14.8 billion of debt financing a portion of the purchase price after attracting significant investor demand, according to Debtwire Par.
High yield issuance holds steady
US high yield bond issuance was stable year-on-year, with a small increase from US$428.3 billion in 2020 to US$429.7 billion in 2021. In 2020, issuance hit a five-year high as issuers turned to high yield markets to secure liquidity during COVID-19 uncertainty. That robust pace continued in 2021 and was significantly higher than pre-pandemic levels despite a drop in refinancing activity, which slid from US$283.1 billion in 2020 to US$272.1 million in 2021 as some issuers opted to refinance in the more attractively priced loan markets.
US high yield issuance linked to M&A and buyouts, however, showed strong gains to offset the dip in refinancing. M&A high yield bond issuance more than doubled year-on-year, from US$25.6 billion in 2020 to US$60.9 billion, while buyout bond issuance followed a similar path, from US$11.5 billion to US$27.6 billion.
The increase in high yield issuance for M&A and buyout transactions was driven by dealmakers taking on ever larger deals and the need for high yield debt to fill out capital structures in these larger deals.
Positive outlook despite headwinds
Momentum from the strong activity levels seen throughout 2021 is expected to carry into 2022. Through January, US$48.3 billion worth of institutional loans have syndicated and US$16.9 billion in high yield bonds have been issued, according to Debtwire Par, with more than 96 deals still in the pipeline that have been announced but have not yet come to market for financing.
Persistently high inflation coupled with clear signals that the Federal Reserve will move to increase interest rates sooner than expected is creating a more challenging backdrop for leveraged finance issuance, especially as many borrowers took advantage of favorable market conditions in 2021 to refinance debt and extend debt maturity profiles.
M&A activity among both private equity firms and companies, however, has shown no sign of slowing down and a strong pipeline of deal financing opportunities is already building.
Following significant refinancing activity in 2021, borrowers have continued to access both the institutional loan and high yield bond markets this year, staying nimble and seeking to capitalize on opportunities to refinance their capital structures. Fertitta Entertainment (f/k/a Golden Nugget) successfully completed a US$6 billion refinancing to close out January. After launching with each of its TLB, senior secured notes and senior notes sized at US$1.85 billion, Fertitta pivoted while in market in response to investor demand and reallocated US$1.5 billion from the bonds into the TLB.
Even if rising inflation and rate hikes mean US leveraged finance does not quite scale the same heights achieved in 2021, a full slate of deals coming to market and a robust pipeline should keep lenders and borrowers active in the months ahead.