Refinancing and jumbo deals drive global leveraged loan market

Refinancing activity supports a double-digit year-on-year uptick in leveraged loan issuance in the United States and Europe, while mega-deals dominate in the Asia-Pacific region

Leveraged loan markets in the United States, Western and Southern Europe and the Asia-Pacific region (excluding Japan) (APAC) delivered steady performance through the first half of 2021 with issuance stabilizing as economies began to fully reopen.

In the US, leveraged loan issuance to the end of June 2021 climbed to US$763.5 billion, up 60% year-on-year from the US$478.1 billion total seen during the same period in 2020.

In Western and Southern Europe, leveraged loan issuance climbed 16% year-on-year to US$185.5 billion through the first half of the year. A surge in refinancing deals was the primary driver of the rise.

Sustained demand in the US and Western and Southern Europe comes as borrowers who avoided refinancing unless absolutely necessary during the first waves of pandemic uncertainty—when pricing widened for a short period—return to market. According to Debtwire Par, this created a reservoir of issuers with debt due for amendments.

APAC market stabilizes after quiet start

In APAC, leveraged loan issuance saw robust increased activity in the first half of 2021—in the second quarter of the year, leveraged loans reached US$12.9 billion, the second highest quarter for the region on Debtwire Par record going back to 2015.

Syndicated and club-loan deal value in the region was stable, edging slightly higher year-on-year despite a drop in India, Indonesia and Australia, according to Debtwire Par. China, Singapore and Hong Kong, by contrast, posted double-digit increases year-on-year.

The overall leveraged and non-leveraged loan market in APAC saw H1 2021 issuance drop slightly to US$164 billion from US$167.8 billion over the same period last year. Deal count dropped 9% to 390 deals from 426 transactions in H1 2020.

China has been the cornerstone of loan activity in the region. The country generated deals valued at nearly US$50 billion over the first half of 2021, up more than 40% year-on-year according to Debtwire Par and representing more than a quarter of overall APAC issuance.

Large deals backed by technology giants Alibaba, Baidu and Tencent supported the growth in the Chinese market, accounting for more than a third of overall Chinese issuance according to Debtwire Par. Alibaba wrapped a US$6.5 billion loan due in 2026, Baidu secured a US$3 billion five-year loan in April and Tencent secured a US$8.3 billion five-year loan in February.

This cluster of jumbo deals in China has helped to build momentum across the entire region going into the second half of the year, with Q2 2021 loan issuance up more than 30% quarter-on-quarter to US$93.4 billion.

New money deal dip

Refinancings and repricings drove activity across the board. In APAC loan refinancings and repricings (including leveraged and non-leveraged loans) jumped from US$39.4 billion in Q1 2021 to US$60.9 billion in Q2.

At the same time, new money loan issuance slid 7% year-on-year to US$63.3 billion in H1 2021 while M&A and buyout issuance remained stable, year-on-year, at US$20.4 billion.

In Europe, refinancing activity also outpaced new money issuance. New money leveraged loan deals in Europe are down 14% year-on-year—from US$93.5 billion to US$80.8 billion—despite the overall increase in issuance. In May 2021, refinancing accounted for more than half of overall loan activity in the region, according to Debtwire Par.

The strong refinancing appetite observed in European and APAC markets through the first half of the year mirrored trends in the US. Refinancing and repricing deals in the country’s leveraged loan markets reached US$471.7 billion by the end of June 2021, accounting for 62% of overall loan issuance in that period and up almost 80% year-on-year.

European new money deals thus far in the year have been dominated by a handful of large loans backing leveraged buyouts. In February, UK supermarket chain ASDA raised an €840 million term loan B alongside a significant note offering to support its leveraged buyout.

Danish timber retailer Stark Group, another LBO target, took on a €1.35 billion term loan B. German real estate firm Apleona and Swedish pharmaceutical contract developer Recipharm secured term loan B financing packages of €765 million and €1.1 billion, respectively.

Some signs indicate that refinancing activity in Europe may start to cool in the second half. Through the course of 2021, pricing gradually increased, with margins on single B and double B loans at the start of the year coming in at Euribor +3.53% and Euribor +2.58%, respectively, and climbing to Euribor +4.15% and Euribor +3.18% by the end of May.

Pricing did move back in favor of European borrowers in June, but there is less certainty that the refinancing surge that has characterized the European market will continue into the second half of the year.

APAC focus on ESG

In APAC, pricing has been less of a factor, but the region has seen a sharp increase in sustainability-linked loans, tracking trends in the US and Europe where ESG-ratchets—which shift margins up or down depending on lender compliance with pre-agreed ESG criteria—have become a more common feature in loan documentation.

The issuance of sustainability-linked loans in APAC reached record levels in Q2 2021 after posting a more than five-fold increase from US$1.69 billion in Q2 2020 to US$9.46 billion in Q2 this year.

Sustainability-linked loan highlights included Changi Airport securing a US$2 billion two-year club loan deal in April and Australian private hospital group Ramsay Health Care signing a A$1.5 billion multi-currency syndicated revolving credit facility. Australia has been the most active jurisdiction for sustainability-linked issuance, representing 53.1% of the market, followed by Singapore with a 29.5% share.

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