News in brief

January 2024 | Issue 260

Low margins and scarcity of LBOs hurt term loan revenues

Despite a resurgence in global term loan B (TLB) volume, which grew by 30% to reach $416.6bn as of December 2023, revenue earned by arranging banks on these facilities only totalled $3.0bn, according to our sister publication Dealogic’s investment banking fee modelling. This represents a 70% drop from the peak seen in 2021 ($10.7bn), $844m down on 2022 YTD and the lowest on record.

Revenue on TLBs nosedived as nearly 70% of borrowers came to the market to refinance or amend existing facilities to extend their debt wall and/or benefit from falling margins.

For example, after tapping the market in November 2022 with a $3.6bn facility, Open Text came back after nine months to lower its margin from SOFR+350bps to S+275bps.

The drop in traditional fixed income revenues may explain the recent pivot towards the CLO market from a number of banks. Both CIBC and Scotia Bank arranged their first deals in November.

New LBOs in the TLB market have been scarce, reaching only a 9.0% share of 2023 borrowings, the lowest in the past decade.

So far this year, only 35 LBOs were signed, compared to 116 facilities in the same period last year. GTCR’s $6.7bn cross-border facility to support the leveraged buyout of Worldpay Inc was the largest this year and accounted for 15% of LBO volume.

2022 vintage CLO generates record European IRR as loan prices rally

While most managers have reset 2022 CLOs, Apollo-affiliated Redding Ridge took a different route. It called RRE 14 CLO, achieving the highest IRR of any European CLO.

RRE 14 CLO priced on 16 September 2022 in a deal led by Goldman Sachs. It had a one year non-call period. When it was called in November it generated a net IRR of 25.89% (based on par equity value).

By our calculation that is the highest post-crisis IRR for a European CLO, although it just misses a place in our top-ten, which is dominated by US deals.

Market sources say that, as with other deals from 2022, which at first looked like questionable bets, RRE 14 CLO was transformed by rising loan markets. Assets for CLOs ramped in July of 2022 accessed an average purchase price of 92.5%.

Global loan markets have since rallied, leading to the huge gains in par build that drove the IRR.

According to a source familiar with RRE 14 CLO, its equity was actually issued at 80%, which would give the deal a net IRR of 58.47%.

Creditflux is unable to independently verify purchase prices.

*net, assuming equity at par

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Global credit funds & CLO's

January 2024 | Issue 260

Published in London & New York.