Leveraged loan markets are on a roll as falling interest rates in the US and Europe reduce financing costs and encourage issuers to return to the market.
In the US, leveraged loan issuance reached US$1.3 trillion during the first three quarters of 2024, almost double the US$669.7 billion issued during the same period in 2023. In Europe, issuance also nearly doubled, rising from US$123.8 billion through the first nine months of 2023 to US$244.6 billion during the same time this year, owing largely to a spike in issuance in Q2.
US and European markets have been buoyed by central bank rate cuts, with the US Federal Reserve, Bank of England and European Central Bank all reducing rates from the elevated levels observed a year ago. This has given borrowers and investors more clarity on financing costs and opened the door for issuers to raise debt at lower prices after a prolonged period of high rates.
In the Asia-Pacific (excl. Japan) region, by contrast, issuance has decreased slightly year-on-year due to slower than anticipated GDP growth in China, the region’s largest market. Issuance of leveraged and non-leveraged loans in the Asia-Pacific region dropped from US$212.5 billion over the first nine months of 2023 to US$192.4 billion over the same period in 2024. Those figures represent an annual decline of 9.4%, though most of that drop can be attributed to a noticeable dip in issuance in Q1 2024, whereas Q2 and Q3 demonstrated more stability.
Refinancing rebound
The improvements in year-on-year loan issuance in the US and Europe have been driven predominantly by a surge in refinancing. Issuers who have been waiting for pricing to improve finally have an opportunity to proceed with refinancings at more reasonable levels.
In the US, total refinancing value came in at US$799.4 billion over the first nine months of 2024, already eclipsing the full-year total achieved in 2023 (US$632.9 billion) and accounting for 62.5% of the overall US issuance so far in 2024.
Meanwhile, in Europe, refinancing has, at first glance, had a strong year. Refinancing-related issuance for the first nine months of 2024 reached US$120.2 billion, also exceeding 2023’s full-year total (US$110.3 billion) and accounting for 49% of total issuance in the region. However, refinancing-related issuance declined markedly quarter-on-quarter, almost halving from US$45.9 billion in Q2 to US$23.4 billion in Q3, marginally ahead of Q3 2023’s total of US$22.4 billion.
Nevertheless, for the year, buoyant refinancing activity has been spurred not only by lower base rates, but also by narrower margins, which have brought down debt pricing. According to Debtwire, average margins on first lien institutional loans in the US came in at around 3.53% in Q3, compared to almost 4% at the end of 2023. In Europe, average margins on first lien institutional loans registered at 3.96% in Q3, down from the 4.47% margins at the end of last year.
Lower margins and base rates have also helped to support new money issuance. US new money issuance was up by 13.16% year-on-year, according to Debtwire, while in Europe new money issuance rose by 13.74%.
However, despite growing momentum, new money issuance remains well below historic levels. Lenders and investors are hoping that anticipated increases in M&A and buyout activity over the coming months will help to bolster more new money opportunities.
To date, slow M&A and IPO markets have generated a spike in dividend recap activity in North America, with Debtwire recording a three-fold increase in regional dividend recap activity to US$18.2 billion over the first nine months of 2024. US private equity sponsors who are unable to exit assets given the flat M&A and IPO market conditions have turned to dividend recaps to unlock liquidity and make distributions to their investors.
APAC markets await rally in China
Dealmakers in the Asia-Pacific (excl. Japan) region are hoping that the Chinese government’s far-reaching stimulus package will help to boost economic activity and revive issuer demand as China emerges from a period of disruption following a series of defaults in its crucial real estate sector.
The stimulus package includes reforms to remove minimum mortgage rates and lower minimum deposit rates. Other measures include establishing a funding facility to support affordable housing and a US$114 billion lending pool to bolster capital markets.
As lenders and issuers across the region await the impact of the stimulus package to begin flowing into China’s economy, one of the bright spots in the APAC (excl. Japan) market has been the resilience of green and sustainability-linked loan activity. According to Bloomberg, green loan volumes rose by 8% year-on-year over the first nine months of 2024, while sustainability-linked issuance was up by 10% over the same period.
Singapore and Hong Kong have been the key hubs for the region’s growing sustainability and green loan ecosystem, with issuers of green and sustainability-linked loan products enjoying strong support in these markets. For example, April International Enterprise secured a multi-currency sustainability-linked loan comprised of Chinese renminbi and US dollar tranches valued at US$1.45 billion and supported by 40 lenders.
Meanwhile, in the mainstream loan market, there have also been opportunities for blue-chip borrowers to tap markets successfully, with Alipay Hong Kong raising a US$5 billion loan facility. Despite tight liquidity and a still-cautious lender base, the APAC (excl. Japan) loan market remains very much open for high-quality issuers.
Overall, the recent rally in leveraged loan issuance in the US and Europe signals renewed borrower confidence. However, new money issuance lags historical norms, and sustainable growth will likely depend on a recovery in M&A and IPO activity in the medium term. The markets appear cautiously optimistic, positioning the coming months as a potential turning point where improved economic conditions and strategic activity could build on the current momentum.
