Troubled waters: global loans struggle to stay afloat in third quarter
Global loan market activity continued to battle macroeconomic headwinds in 3Q22, reaching only USD 792bn of total issuance, down 35% from the same period last year. The quarterly figure is the second lowest in the past decade, exceeding only the USD 700bn raised during pandemic-afflicted 3Q20. Activity has been bolstered by issuance from the Americas, where firms managed to raise capital in excess of 2020’s total. In contrast, issuers in EMEA recorded the lowest overall quarterly activity (USD 730bn) since 2009, while issuance in Asia-Pacific (USD 508bn) fell below the level of the global financial crisis in 2008-09.
Macroeconomic factors continued to plague issuance, with rampant inflation resulting in tightening monetary policy, in turn increasing expectations of a recession in the near future. Together with destabilisation in Europe caused by Russia’s ongoing invasion of Ukraine, markets continue in risk-off mode, draining capital from the equity markets and debt funds.
In recent years, the fourth quarter has represented a little over 26% of total issuance, which suggests a FY22E overall expected value of USD 1.2trn given the figures in the year to date (YTD). However, if sentiment remains sour for the rest of this year and into next, alongside insipid demand for both new M&A transactions and refinancing in light of surging interest rates, there is a high likelihood that issuance falls short of this mark.
Loan activity declines across both higher- and lower-rated firms
Issuance YTD shows that the leveraged market has displayed a surprisingly strong performance versus investment-grade (IG) activity. In the Americas, an approximately equal amount of debt was raised in the IG and leveraged markets, while in EMEA 69% was IG and in Asia-Pacific 61% was IG. All these figures are close to their averages in recent years, meaning there has so far not been a flight to safety in terms of assets, but rather an overall cooling of activity so far this year.
Issuers put off debt refinancing
The maturity wall remains largely unchanged from that seen in the 1H22 review as most issuers have been holding off any refinancing activity because of the sharp increase in pricing over the year. Loan volume in the Americas has a peak in 2025 of USD 638bn, while Asia-Pacific loans have a closer maturity wall peak in 2024 of USD 452bn. Loans in EMEA have the nearest peak, with a total USD 513bn coming due in 2023.
ESG in Americas continues to blossom
Environmental, social and governance (ESG) issuance is slightly below the pace set last year at USD 407bn. In isolation, this would be a poor portent for the asset class, which has taken such great strides in recent years. However, in the context of wildly-lower overall issuance, ESG has continued to rise as a proportion of overall issuance. In the first nine months for the past four years, ESG has risen from 2% of overall issuance in 2019 to 3% in 2020, then jumped to 10% in 2021 and to 12% in 2022 YTD. The number of facilities has also continued to rise from 427 in 9M21 to 513 so far this year.
Use of proceeds retains proportions
In contrast to ESG loans, when looking at use of proceeds the proportion of each slice has remained largely the same in recent years, while the overall volume attributed to each has decreased significantly. The largest outlier from this pattern is M&A financing, which has declined to USD 413bn, accounting for 12% of total issuance – its lowest value in recent years.
Average tenors diverge
One metric that has changed significantly from previous years is the average maturity on newly-issued loans. However, this trend is split with firms in the Americas and Asia-Pacific deciding to issue much shorter facilities, whereas issuers in EMEA have opted to increase the maturity length of their facilities. New debt in the Americas is approaching an average of four years, while Asian firm issuance has averaged near five years and EMEA firms are close to six.
Borrowers in EMEA and Asia-Pacific are dealing with higher near-term spikes in the maturity wall meaning that the longer average maturity should favour practices in EMEA, while Asian companies will continue to fight the fire of refinancing outstanding debt in the years to come. The easier sloping maturity wall in the Americas allows for more leeway in shortening maturities. Current forecasts predict that the economy will be back on track by the maturity of the average four-year tenor of the recent Americas loan issues. However, many predictions of late have suffered from premature expectations of a return to normality, while macroeconomic trends have seemingly done anything but.