Cold thaw: New year off to a cool start as volatility takes hold of markets
Leveraged lending kicked off the new year at a slower pace than seen in the prior two years, with leveraged loan issuance of USD 70.1bn and high yield bond issuance of USD 16.9bn. While it is a month-over-month improvement overall, compared to this time last year, leveraged loan volume is down 31% with high yield bond issuance sliding 66% from last January.
A similar trend is seen when looking specifically at the institutional segment of the leveraged loan market, where January issuance of USD 48.3bn represents an improvement from the December 2021 low of USD 33.5bn, but a 44% decline from the USD 85.5bn in issuance seen last January when loan repricings dominated the market.
It wasn’t all bad news in the loan market, where new money financings continued to outpace refinancing transactions and accounted for 59% of monthly institutional loan issuance. In fact, M&A and buyout activity accounted for 93% of the new money figure and represented 117% and 93% improvements over the January 2021 figures.
On thin ice: Loan secondary market wobbles amid inflation uncertainty
The secondary loan market saw an uptick in volatility, with average bids declining to 97.72 from 97.78 in December. While it represents only a modest slide in pricing, one of the reasons for lower loan volumes this January stems from the secondary markets, which have been less supportive of repricing activity.
Compared to last January, when 25% of loans in the secondary market were bid at a price of par or higher, just 15% of loans this year are trading in the par-plus range. Additionally, 17% of loans saw pricing move lower during January, as increased levels of volatility have caused some debt to trade lower. In turn, loan repricing volume has tumbled from USD 43.2bn last January to just USD 4.4bn this month.
Weather the storm: Weakening demand contributes to reduced primary market activity
CLO issuance has dropped off significantly from the record-setting levels seen last year, bringing with it demand for the loan asset class. New-issue CLO volume has fallen 46% to USD 4.9bn year-over-year, while refinancing and reset volumes slid 71% and 30% respectively, to USD 2.4bn and USD 1.9bn. This begs the question of whether demand can sustain issuance in the face of higher inflation and heightened macroeconomic uncertainty.
Credit quality has been as healthy as ever, however, with the Fitch trailing twelve-month loan default rate holding steady at 0.6% in January following a USD 210m debt restructuring for Fusion Connect, its lowest level since 2011.
