Leveraged finance (LevFin) issuance across European institutional loan and high-yield (HY) bond markets totalled USD 80bn in 2022, in stark contrast to the record-high USD 306bn raised in 2021. The 74% year-on-year (YoY) slump in loan and bond volumes came as challenging macroeconomic and geopolitical conditions fed market volatility throughout the year, leading to a soaring 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, with markets rallying 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 on news that 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 remained constructive as the year drew to a close, uncertainties surrounding inflation, interest rates and the economy are still expected to pose challenges for LevFin markets in 2023.
Run-down
Institutional loan issuance contracted 69% year-on-year (YoY) to USD 53bn across 105 deals in 2022, compared with USD 170bn raised from 231 transactions 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 9.9bn 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.
HY bond issuance collapsed in 2022 to only USD 27bn across 61 deals, marking an 80% YoY fall from USD 137bn raised across 217 transactions in 2021. Issuance declined from USD 14bn in 1Q22 to USD 7bn in 2Q22, dropping to only USD 2bn in 3Q22. A moderate revival took place as the final quarter progressed, with volume crawling up to USD 5bn in 4Q22.
High costs
The cost of issuing leveraged loans kept soaring to new heights in 2022. After peaking in 3Q22, it reversed course. In 4Q22, the weighted average margin on institutional loans fell to 475 basis points (bps) from 526bps over the same period. Original issue discounts (OIDs) followed a similar trajectory, with institutional loans averaging a 7-9% between July and October, falling to a weighted average of 4.5% in the final two months of the year.
However, in the bond markets, weighted average yields for new HY issues have remained at heady heights. The average yield climbed to 10.1% from 5.4% in 1Q22. Largely absent in previous years, OIDs became a common feature on primary HY bond issues in 2022.
On the mend
Secondary leveraged loan and HY bond markets lived through a rollercoaster 2022, as volatility remained elevated and the cost of debt ballooned. Nevertheless, as market conditions improved in the last quarter, yields started edging down.
Weighted average bids on loans reached 88.6 on 30 December, an improvement from the low of 85.96 on 17 October, but behind the August peak of 91.15 and far south from 97.125 at the start of the year.
Secondary bond yields exploded from weighted average lows of 2.82% at the start of the year to peak at 8.37% in October. Weighted average yields fell to 7.51% by the end of the year. Nevertheless, yields remain above the August-rally lows of 5.84% in Europe.
Primary drivers
The pipeline for mergers and acquisitions (M&A) and leveraged buyouts (LBOs) contracted significantly in 2022, as new deal creation slowed. Underwriters had to place large chunks of debt originally meant for the leveraged loan and HY markets with direct lenders instead.
M&A and LBO financing totalled USD 46bn or 55% of total LevFin issuance in 2022, compared with USD 113bn in 2021. Refinancing, recap and repayment transactions reached USD 27bn during the year, only picking up pace in the final quarter after thin second and third quarters. This volume represented 33% of the total and is dwarfed by USD 127bn transacted in 2021. General corporate purposes accounted for 13% of 2022 volume, or USD 11bn, compared with USD 72bn recorded the previous year.
Slower churn
Collateralised loan obligation (CLO) printing slowed down in 2022 as the cost of liabilities crept up and the pool of equity investors shrunk. New CLO issuance totalled EUR 26bn, down 32% from EUR 38.5bn in 2021. After a notable slowdown in 2Q22, CLO printing started picking up pace in July. Refinancing and resets crunched in only EUR 5.9bn in 2022, lagging far behind 2021’s EUR 57.5bn.
