In retreat – leveraged issuance plunges 84% YoY in 3Q22, as macroeconomic overcast persists
Leveraged finance (LevFin) issuance shrank to one of the lowest quarterly levels since the global financial crisis amid persistently challenging macroeconomic conditions and a high cost of debt. In 3Q22, the total volume of syndicated institutional loans and high-yield (HY) bonds across the US and Europe plummeted 84.4% year-on-year (YoY) and 52.5% quarter-on-quarter (QoQ) to USD 52bn. Year-to-date (YTD) issuance is down 72% at USD 367bn compared with USD 1.3trn raised in the first nine months of 2021.
A bout of optimism buoyed the markets on both sides of the Atlantic in August, as investors assumed that inflation levels had peaked and less aggressive interest-rate hikes lay ahead, but the rally was cut short as higher-than-expected inflation figures emerged. The latest round of central bank rate hikes and prospects of hawkish monetary policies in the months ahead, along with other negative economic and geopolitical headlines, again heightened market volatility, dampening hopes of a meaningful recovery in primary issuance.
The US institutional loan market endured its largest quarterly contraction thus far this year, as issuance decreased 60% to USD 28bn in 3Q22 (2Q22: USD 69bn), while deal count halved to 59 from 118. By comparison, USD 125bn of loans were raised in 1Q22, and USD 169bn in 3Q21. YTD volume dropped 66.9% to USD 222bn (9M21: USD 671bn).
In Europe, institutional loan volume halved to USD 4.1bn across 10 transactions in 3Q22 from USD 8.3bn raised via 15 transaction in 2Q22. Compared with the same period in 2021, third-quarter issuance dropped 87%, while 9M22 volume declined 76.6% YoY to USD 34bn.
Tight liquidity at the start of the summer and falling secondary prices meant that issuers vying for buysiders’ cash in July had to offer steep discounts and a compelling credit story to get over the line. By August, primary issuance almost entirely disappeared, making it the worst month on record for European leveraged loans. However, the market bounced back in September after an uptick in new euro collateralised loan obligation (CLO) formations boosted liquidity.
US HY bond issuance stood at USD 19bn across 21 deals in 3Q22, and while this translated to a 24.7% decline from USD 25bn raised in the previous quarter, YTD volume slid 77.4% to USD 89bn compared with USD 393bn raised in the first nine months of 2021.
In Europe, 3Q22 HY bond issuance stood at only USD 1.2bn across five transactions, collapsing 83% from USD 6.8bn raised in the preceding quarter and 94.8% from USD 22.6bn in 3Q21. For 9M22, issuance totalled USD 22bn, down 79.6% YoY.
The cost of issuing leveraged loans continued to climb to new heights, reaching a peak since the COVID-19 pandemic shut down markets in 2Q20. In 3Q22, the weighted average margin on institutional loans in the US primary market crept up to 475 basis points (bps) from 434bps in the previous quarter, while jumping to 529bps from 448bps in Europe.
At the same time, original issue discounts (OIDs) steepened in response to the secondary market, pushing weighted average yields to 8.9% in the US and 8% in Europe from 6% and 5.5% in 2Q22, respectively.
However, the US HY bond market saw weighted average yields for new issues fall to 7.6% in 3Q22 (2Q22: 8.1%). The data reflects a drop in yield on senior unsecured issues to 7.3% from 7.9% in 2Q22, while the average yield on senior secured notes held at 8.5% in both quarters.
In Europe, weighted average yields on new HY bonds spiked to 11.1% in 3Q22 from 6.8% in 2Q22, while OIDs have also become common on primary deals in recent months. Average yields on senior secured paper jumped to 11.6% from 7.5% in the previous quarter, while yields on senior unsecured notes averaged 9% compared with 6.1% in the second quarter. However, there were hardly any senior unsecured issues to test the data point.
Rollercoaster ride: loan bids recover, as bond yields climb back up
Secondary leveraged loan and HY bond markets went through a turbulent summer, rallying in August as investor sentiment improved, only to reverse course a few weeks later as negative macroeconomic headlines started to emerge.
Weighted average bids on loans in the US secondary market rallied to a highest point of 94.21 on 12 August from 91.42 at the start of July and subsequently headed south, reaching 92.67 on 22 September. European pricing followed the same pattern, reaching 90.04 on 22 September from an August peak of 91.15 and a low of 87.59 on 1 July.
Similarly, secondary US and European HY bond prices rallied in August, pushing weighted average yields down to their lowest point of 7.19% in the US and 5.84% in Europe in mid-August from 8.83% and 7.3%, respectively, at the start of July. However, investors began to flee as it became evident that hawkish interest-rate hikes were in store, with weighted average yields climbing back up to 8.84% in the US and 7.36% in Europe on 22 September.
Primary drivers: LBOs and M&A dominate as refinancing dwindles
In the US, M&A and buy-out-related financing accounted for 58.8% of total LevFin volume, with USD 27.5bn raised in 3Q22. Despite making up a high proportion of the total issuance, M&A and LBO financing showed a significant contraction compared with USD 49bn raised in 2Q22 and USD 84bn in 1Q22.
Refinancing transactions also ebbed away as the high cost of debt deterred those with no near-term maturities from tapping the market. As such, refinancing and recaps amounted to USD 12.5bn in 3Q22, down from USD 35.6bn and USD 66bn in the two preceding quarters, while accounting for 26.7% of total issuance. By comparison, this figure stood at USD 129bn in 3Q21 and represented 46.7% of issued debt.
In Europe, M&A and buy-out activity made up 69.3% of total LevFin issuance in 3Q22. But coming in at only USD 3.6bn, volume declined 63.6% QoQ and marked an 85.6% slump from USD 25bn in 3Q21. At the same time, the M&A/LBO pipeline contracted around 40% from the start of the third quarter, as new deal creation slowed. Underwriters also sold part of the debt that was meant for the leveraged loan and HY markets to direct lenders.
As most borrowers extended their maturities last year at more favourable rates, refinancing and recap transactions have become thin on the ground, cascading down to a little under USD 1bn in 3Q22 from USD 2.9bn in 2Q22 and USD 13.2bn in 1Q22.
Steaming ahead: CLO printing resumes in Europe, while US cools in August
In the US, CLO printing machines have held up relatively well throughout the year, with new CLO issuance totalling USD 102.6bn, only 23% down YoY. However, signs of a slowdown appeared in August, with new-issue volume declining 46% from July to USD 7.6bn. Refinancings have been largely absent from the market this year, crunching in a miserly USD 4.6bn of CLO issuance to date, while resets amounted to USD 17.9bn. There have been no reissues thus far in 2022.
In Europe, new CLO issuance this year totals EUR 20.1bn, down only 20% YoY. After a slowdown in 2Q22, CLO printing picked up in July with more issues following in August. Refinancing and resets still lag far behind last year at EUR 5.93bn YTD, while reissues have also been absent from the European CLO market this year.
Data correct as of 30 September 2022
Playing defence: technology and healthcare lead sector charts
The computers & electronics sector continues to top the charts in the US this year, with USD 13.9bn raised in 3Q22, giving a USD 76.4bn total for 9M22. Healthcare has also been favoured, hauling in USD 5.5bn in the third quarter and USD 30.2bn YTD.
In Europe, healthcare reigns the sector chart this year, generating USD 8.8bn in 9M22, followed by USD 7bn in the computer & electronics sector. However, the latter trumps healthcare in the 3Q22 chart, generating USD 1.9bn.
All data correct as of 23 September 2022 unless otherwise noted