NEW YORK, March 29 (LPC) - US syndicated lending sank to its lowest quarterly level since the first quarter three years ago, retreating after two straight record issuance years, after fourth quarter volatility and growing economic concerns steered many borrowers to the sidelines.
The US$399bn of loans arranged in the first three months this year, down about 36% from US$622bn in the same quarter last year, was the smallest since US$356.5bn in the first quarter of 2016, according to LPC, a unit of Refinitiv.
Bankers are looking for at least a steady pace of loan demand for mergers, leveraged buyouts (LBOs) and refinancings in the near term, with equities and loan prices on the mend after deep sell-offs late last year.
Leveraged lending to low-rated highly indebted companies took the biggest hit in the spillover from fourth quarter turbulence, far overshadowing the issuance decline in investment grade loans that are far more insulated from defaults in an economic slump.
The US$151.9bn of US leveraged loans issued by highly-indebted companies in the first quarter sank 56% from the same period last year to the lowest volume since US$133.3bn in the first quarter of 2016.
Investment grade volume slid 11%, in contrast, to US$190bn.
“The volatility in the fourth quarter certainly caused underwriters to be a bit more discerning than earlier in the year, which probably contributed to a lighter first quarter,” said a senior banker who covers both sectors.
LBO financing slid to a one-year low of US$23bn, including US$6.45bn-equivalent of loans for Brookfield Business Partners’ buyout of Johnson Controls’ Power Solutions business. Total leveraged M&A lending shrank to US$59bn from US$104bn in the fourth quarter and from US$84bn a year ago.
“LBO pricing probably widened by about 100bp in the fourth quarter,” the banker said. “As markets have stabilized, we’ve probably recouped 50-75% of that widening, which will help drive a rebound in issuance.”
Yields on newly issued leveraged loans have increased to the highest levels since the fourth quarter of 2011, according to LPC.
This is also tempering the incentive to rush deals to market.
“The forward calendar is pretty light right now as well – there’s not a tremendous amount of dealflow on the immediate horizon,” said Chris Remington, director of income product and portfolio strategy, and institutional portfolio manager for Eaton Vance floating-rate loan strategies.
Remington noted that leveraged loan prices tumbled in the fourth quarter to an average of 94 cents on the dollar, from par, before rebounding to around 97 currently.
“Lower loan prices are a natural regulator on new issuance,” he said.
The Federal Reserve this month signaled that it would stall its three-year rate hiking campaign, keeping rates steady likely all of this year, due to signs of economic slowing.
Low rates for longer could temper a recession when it does come, and also play a role – along with equity valuations - in decision-making about when to pull the trigger on mergers and buyouts.
Companies are also unlikely to be in a rush to refinance debt, having already locked in low rates and extended maturities.
Leveraged refinancing volume dropped to US$73bn in the first quarter from US$148bn in the prior quarter, and US$229bn a year ago.
Preparing for the next economic downturn could also raise the focus on credit quality and leveraged loan exposure.
“Banks are taking some steps to be a bit recession ready,” said Karen Davies, senior vice president, private equity managing director and group head at Huntington Commercial Bank.
“That always brings into question leveraged lending – how exposed are you to leveraged lending? How much of your book is highly levered and how is the book performing year over year? Are they actually delivering? Continue to stick to your knitting – stick to judicious client selection, strong performing assets.”
Investment grade loan issuance declined far less than leveraged loans, although it was concentrated in a handful of large healthcare and technology merger financings.
The US$190bn in high-grade loans in the first three months, down 11% from the same quarter last year, was the lowest since US$181bn in the third quarter of 2017.
The lion’s share came from lending to back Bristol Myers Squibb’s purchase of Celgene Corp in the biggest healthcare acquisition ever, as well as financial technology provider Fiserv’s purchase of payment processor First Data.
“The high volume numbers mask the fact that it’s a small cluster of very big deals, and a limited number of banks are benefitting from that,” said another senior banker.
But the prospect of recession could be one factor that spurs more M&A activity now, if valuations are attractive, some bankers said.
Late in the economic cycle, “I sense a greater urgency in the corporate market – shareholders are impatient and they want profit and for companies to deliver results sooner,” the senior banker said. “That points to M&A as a logical and compelling means of achieving those objectives more quickly than an organic growth strategy.” (Reporting by Lynn Adler; Editing by Michelle Sierra)