Loan markets remain challenging, but green shoots emerge

Loan issuance slowed in all key regions during the first nine months of 2023, but after a tough year there are signs that market conditions may be improving

Loan activity across the globe slowed significantly during the first nine months of 2023, with interest rate hikes, the impact of the macroeconomic downturn on companies and declining M&A volumes affecting issuance.

In the US, leveraged loan issuance fell by 25.5% year-on-year from US$849.5 billion during the first three quarters of 2022 to US$632.8 billion during the same period in 2023, according to Debtwire data.

Similar year-on-year declines were observed in Western & Southern Europe where issuance for the first three quarters of 2023 totaled just under US$107 billion, a 33% year-on-year drop from the US$159.5 billion recorded in 2022.

In APAC, leveraged loan issuance was down by 30.2% year-on-year, from US$33.4 billion for the first nine months of 2022 to US$23.3 billion during the same period this year.

Institutional appetite boosts US refinancing

After a difficult period for global loan activity, there are signs emerging that market conditions may improve in the months ahead.

In North America, for example, there has been an encouraging recovery in institutional refinancing activity, which has almost tripled from the levels observed a year ago to US$208.9 billion, according to Debtwire figures.

Repricing deals are also back for North American issuers, with Debtwire tracking seven repricing deals in August and September. Repricing deals allow borrowers to reduce the pricing on existing facilities and are an indicator of a more stable market. For example, Koppers, a wood treatment products business, was able to reprice a seven-year US$399 million senior secured Term Loan B and reduce the interest rate margin on the facility by 0.5%.

The rally in repricing and refinancing has been fueled by more attractive debt pricing. Loan margins in North America dropped noticeably in the third quarter, with the average pricing on institutional facilities coming in at 3.9%, down from 4.7% in Q2 2023 and the lowest levels observed since Q1 2021.

The shift in pricing in favor of borrowers has opened a window for companies to bring big ticket refinancing and repricing transactions back to the market.

Fast food group Restaurant Brands International, for example, secured a US$5.2 billion loan to refinance debt maturing in 2026 in one of the biggest loan deals to land in the US markets since the start of 2022. Restaurant Brands International, owner of the Burger King and Popeyes fast-food chains, was able to upsize the deal and negotiate tighter pricing on the back of strong investor demand. Meanwhile, motor racing commercial rights holder Formula 1 has come to the market seeking a US$1.7 billion loan to reprice an existing facility.

In another sign that market conditions may be improving, the number of reverse flexes occurring in North American loan syndications has also increased. Reverse flexes occur when arrangers underestimate investor demand for a loan and are then able to negotiate improved pricing and terms for issuers during the syndication process. According to Debtwire, 29 of the 57 institutional loan facilities issued in North America in September were reverse flexes, with margins moving at an average of 0.3%.

Large deals keep European markets moving

In European loan markets, jumbo deals, including a €1.5 billion Nord Anglia loan, a €1.4 billion facility for Leo Pharma and a €1.4 billion BME Group loan, helped to boost overall issuance even though deal count slid to the lowest levels observed since 2014.

Refinancing has been the main driver of issuance, helping to soften a 69% year-on-year decline in new money activity. The backdrop for new money issuance in Europe has remained tepid after the European Central Bank announced another interest rate hike in September and concerns around deteriorating economic growth forecasts have continued to mount.

However, despite these headwinds, pricing in Europe does appear to be stabilizing, with average margins on first lien institutional loans coming in at 4.6% in Q3 2023, more than 0.5% lower than the 5.2% margin observed in Q3 2022.

Resilient CLO issuance has also kept the European market moving, with Debtwire tracking seven new CLO deals worth a combined €2.8 billion in September. This helped to push new CLO formation in Europe to €18.1 billion for the first nine months of 2023, just 11% lower than the figures for the same period in 2022.

Tough times for APAC

For APAC loan markets (excl. Japan), the outlook remains more challenging than in the US and Europe, as lenders and borrowers continue to grapple with the impact of a credit crunch in China’s real estate sector.

Real estate accounts for around a quarter of China’s economy and, with some of the country’s biggest property developers defaulting or are at risk of defaulting, the World Bank has cut China’s growth forecasts. This has hampered new lending activity, with fears that the fallout from the real estate market will ripple across other sectors.

A cluster of issuers in Greater China have been able to secure loan deals during this period, including Alibaba Group (US$4 billion) and Sun Hung Kai Properties Financial Services (US$3.51 billion), but overall, markets have retrenched in the face of the real estate disruption.

Outside of China, loan issuance in Southeast Asia has proven resilient, matching the levels recorded in 2022.

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