Investors in the leveraged loan and high-yield (HY) bond markets rejoiced following a better-than-expected inflation reading last week that sent equity markets soaring. On Thursday (10 November), the US Bureau of Labor Statistics reported that core inflation slowed to 7.7% in October, well below estimates of 8% and an encouraging sign that the Federal Reserve’s monetary tightening has been effective in cooling price growth. Many investors now expect the Fed to start to reduce its interest-rate hikes going forward, likely to 50 basis points (bps).
The long-awaited news propelled equity markets upward, with the S&P gaining 5.5% on the announcement, marking the best day for stocks in the past two years. In the loan and bond secondary markets, reactions were similarly optimistic. Average bids on institutional term loans climbed 95bps to 92.1 from an October low of 91.14. While the loan market reaction was more subdued than that of the stock market, it signifies an important turnaround following a decline of more than 2 points during September and October. Bonds have seen similar gains of late, with pricing gaining 266bps from the October low of 83.58. The fixed-rate instruments are generally more sensitive to interest-rate moves, which have, to date, led to losses of 11.2% for bond investors, according to the ICE BofA US High-Yield Index.
Window of opportunity: syndication pipeline sees burst of activity following inflation reading
Issuers have taken the opportunity to address any urgent financing needs, with the pipeline of deals in syndication gushing up to USD 7.5bn this week from less than USD 1bn in the last week of October. While the figure falls well below the January pipeline, when USD 44bn of loans and bonds were working through the market, it represents the busiest the market has been since September. With future rate hikes now expected to be tamer, and if secondary markets continue to be supportive of issuance, the run should carry through to year-end.
One noticeable trend has been for borrowers to ease back into the market, with incremental and add-on debt. So far this month, three borrowers have priced incremental debt worth USD 1.6bn. The largest incremental financing was issued by Acrisure to support future acquisitions. On the bond side, Spirit Airlines priced an add-on to its 8% senior secured notes due 2025 to repay debt and bolster liquidity. Two incremental term loans are also working through the market, including a USD 75m tranche backing a dividend at Parkway Generation, one of the few issuers brave enough to tap the markets for an equity distribution this year.
Return of the refi: refinancings emerge as primary driver of issuance in November
Another encouraging sign has been the return of refinancing after months of negligible issuance. Following only USD 2.4bn of loan refinancing issuance in October, the November figure to date has already surpassed USD 3bn, with an additional USD 3bn currently in the pipeline. This would mark the highest level of refi issuance since May, when USD 5.5bn was issued to refinance existing debt. Four Seasons is currently in the market with a USD 850m term loan B (TLB) due 2029 to address its outstanding TLB maturing in November 2023. Lenders have floated price talk for the Ba3/BB+ rated hotel operator at SOFR + CSA + 325–350bps and a 97 OID, well tight of average pricing in October, when margins averaged 491bps and most loans priced at an average discount of 96.35.
Total bond issuance in October amounted to only USD 2.4bn, as most borrowers chose to remain sidelined during the market downswing. However, so far this month, USD 6.6bn has priced, with refinancings accounting for USD 4.6bn of the total, and an additional USD 3bn of bonds in the pipeline that are expected to price in the coming days.
