August is a good month to reflect on issuance over the course of the past year, ahead of the September push through to the holiday season and advent of the new year. While syndicated leveraged loan and high-yield (HY) bond markets have endured a challenging time during the past eight months, sentiment is far from rock-bottom thanks to softening expectations of a US recession, leveraged yields stabilising, and defaults merely trickling upward. There may yet be further bumps in the road; however, the market appears ready to spring back into action as and when the shackles are loosened.
The subdued performance in the loan market has been supported by amend-and-extend (A&E) activity, as issuers look to shore up balance sheets ahead of the most telegraphed downturn in recent history. Refinancing has taken center stage in 2023, propping up issuance at over 80% of the total. Not pulling its weight this year is new-money institutional activity, which has seen an eye-watering 70% year-on-year (YoY) collapse on the back of a continuing lack of supply from M&A auctions processes.
The ongoing reliance on refinancing activity via A&E transactions suggests issuers are in a holding pattern, continuing to push out debt that is due to mature in the near term, while future macroeconomic predictions remain unreliable.
Within the debt that has been raised, 2023 has seen a shift towards higher-rated firms, with 39% of leveraged loans rated BB or above this year, up from 32% in 2022 and 30% in 2021, indicating a market actively pursuing the safety of higher-rated credits. This adjustment, while notable, falls within historical patterns and represents a calculated adaptation rather than a drastic departure from established norms.
In line with this move, total and net leverage on new issuance has continued to decline, as average EBITDA rises in the aftermath of the pandemic and debts are simply rolled over, with new-money issues few and far between. Gross leverage in July fell to 3.9x, well down from 5.5x at end-2020.
Also in July, defaults hit 3% for leveraged loans, according to Fitch Ratings, having increased steadily from 0.4% in February 2022. Healthcare and pharmaceutical firms continue to lead the wave of defaults, with almost USD 14bn worth of loans within the past 12 months.
In the bond market, issuers are also preparing for harsher times ahead, electing to use secured structures over unsecured facilities. Secured notes had risen to 50% of senior issuance last quarter from 25% in 1Q21, providing further evidence of issuers’ emphasis on risk mitigation.
One positive takeaway is the relative stability of yields in both the loan and bond markets in recent months, rising 0.8% and 0.5%, respectively, over the course of the year. With hatches seemingly fully battened down, this stability could represent a calm before a storm or a continued softening of the once-likely cataclysm.
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