Q3 leveraged loan issuance down in US and Europe

The leveraged loan market remained cautious after the summer lull

The combined value of year-on-year leveraged loan issuance in North America and Europe dropped from US$312.54 billion in Q2 to US$272.68 billion in Q3.

In the US, issuance came in at US$217.7 billion for Q3 2019, which was down on both the US$243.9 billion of issuance in Q2 2019 and the US$239.9 billion of deals in Q3 2018. Year-to-date US issuance for 2019 sits at US$633 billion, a 44% drop from 2018 levels, when issuance totalled US$1.14 trillion for the same period.

In Europe, issuance slid from US$66.5 billion in Q2 2019 to US$53.9 billion in Q3 2019. The market saw a year-on-year drop of 16% in leveraged loan value to US$168.8 billion for the year through Q3.

Tight supply of well rated loans disappoints US lenders

New money share of issuance is down 29% at US$346.3 billion compared with the first three quarters of 2018. Loan buyers report that, although numerous deals are coming to market, credits with higher ratings and larger deals have been thin.

When well rated loans do come to market, however, lender appetite has been robust. This has divided the market with deals rated B3 or B- struggling to gain traction. Several deals were withdrawn from the market in Q3 as a result, with Peabody Energy, Del Frisco’s and Ahead/Data Blue among the transactions put on ice.

Credits rated BB- or above, however, received strong buyside support as CLO managers actively sought credits with higher ratings to balance portfolios that skewed toward single-B loans with higher spreads. The share of institutional loan issuance rated BB- or higher reached 47% in Q3 2019, versus 38% in Q2 and 20% in Q1.

Selective European lenders seek value in secondary  market

Although loan issuance in Europe fell in Q3, lenders have been relatively relaxed about the dip as the loan market overall is still growing with respect to outstanding debt.

Investor appetite for loans remains robust, with CLOs and separately managed accounts (SMAs) continuing to attract capital-seeking yield in a low interest rate environment. European new-issue volume from CLOs of US$24.5 billion (€22.2 billion) for the year-to-date is ahead of the US$22.8 billion (€20.7 billion) posted over the same period last year.

Mirroring US trends, buysiders in Europe have been more selective and set the bar higher. Lenders in Europe have also seen an opportunity to pick up assets in the secondary market at discounts to par, although the share of institutional loans bid in the par-plus area climbed to 57% in September, up from 40% in August.  

Looking forward

Leveraged loan pipelines in the US and Europe look strong, pointing to a busy finish to the year.

In the US, there are currently US$20 billion of institutional loans in syndication, with more than US$16 billion in additional deals tracked in Debtwire Par's leveraged finance forward calendar. There are 177 deals in ongoing auctions, which could lead to potential loan deals.

In Europe, there are currently US$5.8 billion (€5.3 billion) worth of institutional loans in syndication and 25 deals in the leveraged loan pipeline. With projected funding requirements estimated at US$63.5 billion (€57.6 billion) or more, and year-to-date new European CLO issuance coming in at more than US$23.6 billion (€21.4 billion), the fundamentals are in place for an active final quarter, subject to a Brexit resolution.

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