Leveraged finance (LevFin) issuance across the US and European institutional loan and high-yield (HY) bond markets totalled USD 444bn in the year-to-date, in stark contrast to the record-high USD 1.58trn raised in 2021. The 72% year-on-year (YoY) plunge in loan and bond volumes came as challenging macroeconomic and geopolitical conditions fed market volatility throughout the year, leading to a skyrocketing cost of debt and tight liquidity.
Following a relatively good start to the year – the first quarter accounted for almost half of all 2022 LevFin volume – issuance spiralled down in subsequent quarters as the macro backdrop steadily worsened. As the year progressed, periods of dry spells were followed by bouts of primary activity as markets rallied each time better-than-expected inflation prints emerged. While the late summer rally turned out to be short-lived, leading to another period of drought, LevFin markets nevertheless bounced back in November as inflation again appeared to be slowing down. The pre-Santa rally carried on in December, giving rise to a flurry of deals across both sides of the Atlantic and offering a glimmer of hope for the New Year. Although market sentiment remains constructive as the year comes to a close, uncertainties surrounding inflation, interest rates and the economy are still expected to pose challenges for leveraged finance markets next year.
Run-down: Loan and bond volumes nosedive
In the US, institutional loan issuance endured a thumping 68% YoY drop to USD 277bn across 441 transactions in the year-to-date (YTD 2022), compared to USD 864bn raised via 1,236 deals in 2021. As volatility heightened and liquidity tightened, loan issuance cascaded from USD 126bn in 1Q22 to USD 69bn in 2Q22 and down to just USD 32bn in 3Q22. Volume improved in 4Q22 to USD 50bn after a fresh gust of optimism revived primary activity, allowing some of the larger hung deals to clear the market.
In Europe, the contraction in institutional loan issuance was even harsher, with a 71% YoY plunge to USD 50bn across 101 deals in YTD 2022, compared with USD 170bn raised from 231 transaction in 2021. Quarterly volumes came crashing down from USD 21bn in 1Q22 to USD 12bn in the subsequent quarter, followed by USD 10bn in 3Q22 and USD 7bn in 4Q22. After a short-lived rebound at the start of September, a dry spell ensued before coming to an end in mid-November as market technicals improved, opening up a window for a raft of mostly smaller add-ons and some maturity extensions to clear the market before year-end.
US HY bond issuance bore the brunt of wider macro challenges, tumbling down 77% YoY to USD 91bn across 114 transactions in YTD 2022. In comparison, the market recorded USD 405bn via 548 bonds in 2021 – its best year on record. The slowdown had already begun in the last quarter of 2021 and continued throughout 2022, with issuance shrinking from USD 40bn in 1Q22 to USD 20bn in 2Q22, then further down to USD 19bn and USD 12bn in subsequent quarters.
European HY bond issuance collapsed this year to just USD 27bn across 59 deals, marking an 81% YoY drop from USD 137bn raised across 217 transactions last year. Issuance fell from USD 14bn in 1Q22 to USD 7bn in 2Q22, dropping to just USD 2bn in 3Q22. A moderate revival took place as the final quarter progressed, with volume crawling up to USD 4bn in 4Q22.
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