US loan repricing activity has approached near-record levels in 2024, with falling interest rates and tepid new money deal activity opening opportunities for borrowers to reduce their debt servicing costs.
At the end of Q3 2024, US repricing issuance for 2024 reached US$261.4 billion, more than an eightfold increase from the full-year aggregate logged in 2023. Issuance in 2024 is already higher than any other year on record except 2018 (US$278.9 billion) and 2017 (US$392 billion). If the market maintains its momentum, US repricing issuance in 2024 will surpass the 2018 total and could approach 2017’s by the end of this year.
Perfect conditions for borrowers
After a challenging two years of elevated interest rates driving up financing costs, borrowers seized the opportunity presented by strong repricing activity to cut debt servicing expenses.
The US Federal Reserve has made two interest rate cuts in 2024, which has put borrowers in a better position to renegotiate rates on existing loans with incumbent lenders. A recovery in loan prices in the secondary markets—improving to just over 95 cents on the dollar in 2024—has given borrowers further confidence to forge ahead with repricing proposals.
According to Bloomberg, debt repricing had already saved issuers more than US$1.4 billion in interest rate costs by June 2024, having secured an average margin reduction of around 50 basis points. Momentum has continued through the second half of the year, with issuers consistently locking in margin reductions ranging from 25 to 75 basis points.
Companies that have successfully deployed repricing deals in 2024 to reduce their debt servicing costs include Citadel Securities, which repriced a US$4 billion facility, and software business UKG, which repriced a US$6.3 billion loan—the largest repricing deal of the year as of October 24.
Thin buyout opportunities sustain investor appetite
In addition to falling interest rates, repricing activity has been buoyed by a dearth of buyout financing opportunities and new money deals.
After playing defense in 2022 and 2023, the more stable rate environment has fueled investors’ appetite for higher-yielding assets such as leveraged loans. But the supply of attractive loans coming to the market has not kept up with demand.
M&A and buyout deal markets have remained relatively muted for much of 2024, limiting the number of new loans coming to the market. According to Bloomberg, new money deals have accounted for only about 10% of the total leveraged loan volume in 2024.
The lack of supply has made investors more willing to entertain requests for repricings. With limited options of new issue deals available to replace existing loans, investors have been forced to be more flexible and pragmatic in their requirements. As a result, they have chosen to support repricings rather than risk losing valuable assets from their portfolios.
Experienced borrowers have been quick to take advantage of the repricing window. As the leveraged loan market has matured, both investors and borrowers have become adept at executing repricing deals, making transactions more efficient and less costly.
The ability to reprice a loan has been a common feature of loan agreements for several years. Most loan agreements in today’s market include detailed provisions outlining specific mechanics, terms and conditions for future repricings. Moreover, a decrease in legal and arrangement fees, partially because of these pre-wired provisions, has made the cost of executing a repricing deal marginal compared to the savings on interest costs.
Strike while the iron is hot
Repricing deals will remain available to issuers until M&A and leveraged buyout deal volumes increase, bringing more supply into the market.
Aggregate global M&A deal value declined in 2022 and 2023, since the nearly-US$6 trillion peak recorded in 2021. Although total M&A value has shown some signs of recovery in 2024 (increasing by just over a fifth year-on-year), deal activity remains well below the levels seen at the height of the market in late 2020 and 2021.
However, issuers that have yet to reprice deals will not wait too long. Opportunities for new money deals are starting to emerge, with Bloomberg reporting that September saw a notable uptick in these transactions, accounting for nearly 20% of the total issuance that month.
Issuers that have yet to act will have to get moving if they want to take advantage of the current favorable conditions—the repricing window will not stay open indefinitely.
