After a strong start, leveraged loan markets in the US and Europe shuddered to a halt in March 2020 as the rapid spread of COVID-19 and subsequent business shutdowns put the brakes on new issuance and saw secondary pricing plummet.
Although leveraged loan issuance in the US actually ended Q1 2020 up 75% on Q1 2019, the overall numbers for the quarter mask a bleak month for activity. In March, there was only US$34 billion worth of issuance, according to Debtwire Par. This was more than four times lower than January issuance of US$145.8 billion and less than a third of the US$118.8 billion figure for February. Compared to March 2019, issuance dropped 57%.
A similar pattern played out in European markets, where activity levels remained strong until the middle of February, when issuance all but shut down as the pandemic gripped the UK and continental Europe. A good January and February―€19 billion (US$20.6 billion) and €25.9 billion (US$28.14 billion) respectively―helped to drive a 22% rise in overall issuance for Q1 2020 over Q1 2019; but a weak March, when only €7.23 billion (US$7.8 billion) of loans issued, revealed the full extent of the COVID-19 impact. Expectations going into Q2 are bearish.
US battles on as volatility intensifies
In addition to hitting an issuance cliff edge in March, the US loan market also contended with precipitous drops in loan pricing.
According to Debtwire Par, the gap between sellers’ and buyers’ price expectations escalated during the last six weeks of Q1. In the middle of February, more than two-thirds of loans (68%) traded at a price of 99 cents on the dollar, but as COVID-19 rocked investor confidence, that figure dropped to just 0.3%. The share of loans valued at less than 80 cents on the dollar, meanwhile, reached 57% by the last week in March, up from just 5% prior to the virus crisis. Loans valued at less than 80 cents on the dollar (or the euro in Europe) are usually classified as distressed.
Sectors directly impacted by shutdowns―non-food retail, leisure and entertainment and hotels―suffered the biggest drops in pricing, while the oil and gas industry, which has also had to navigate a pricing war between Saudi Arabia and Russia as well as a supply glut, saw secondary loan pricing fall to an average of 50% of par.
Europe feels the pricing pinch
Volatility and rapid pricing depreciation shook the European loan market in Q1 as well. The percentage of loans priced in the secondary market at €0.80 (US$0.86) or less reached 48% of the market at one stage, with the leisure and retail sectors among the hardest hit, according to Debtwire Par data.
Europe did manage to get some deals over the line. Swiss vending machine operator Selecta secured a €50 million (US$54.4 million) loan facility at the end of March 2020 and US-UK broadband company Zayo Group closed a €750 million (US$816.3 million) loan facility a few weeks earlier.
These examples aside, however, the European loan pipeline gradually diminished through the quarter. There were potential deals worth more than €30 billion (US$32.7 billion) lined up at the start of the year, but this figure now sits at less than €10 billion (US$10.9 billion) going into Q2 2020.
Heading into an uncertain future
After the initial shock following the spread of COVID-19, the US and European markets regained a small measure of stability and reclaimed some of their initial losses.
Huge stimulus packages in the US and UK have provided some respite, but the market has undoubtedly changed fundamentally from where it was three months ago. Volatility is likely to remain a feature of loan issuance for the foreseeable future, and certain aspects of term sheets and pricing are likely to shift back to favor lenders.
Ratings downgrades and defaults have begun and are also expected to rise against 2019. After a period of expansion that ran for more than a decade, a challenging year lies ahead.
