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Global credit funds & CLO's
April 2024 | Issue 263
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April 2024 | Issue 263
Analysis
Loans
US loan volume nears record levels
Ben Watson
In Q1 2024 quarterly institutional loan issuance reached its second highest level on record. The period also saw the lowest quarterly share of new money issuance, at just 13% of total activity
The rise in institutional loan issuance volume in Q1 2024 was led by issuers rated single B and below, which comprised more than 60% of institutional volume. These lower rated issuers have been spurred on by positive sentiment in the market as fears of a US recession fade and the rate-cut conversation turns to the precise timing of when the first cuts will come into effect this year.
In turn, as higher-risk borrowers revisit the market, leverage has returned to historical averages, at 4.7x total and 4.3x net, after a brief dip in the second half of 2023 to 4.5x and 3.9x, respectively.
The positive sentiment was apparent in loan pricing, where there were 56 reverse flexes during general syndication in the quarter — a very positive sign for the market as this figure is beaten in recent history only by the first and second quarters of 2021. The average tightening is modest at just 27bps.
4.7x
Institutional loan market leverage has returned to its historical average
1: US institutional loan issuance
Source: Debtwire
Institutional margins continued to decline in Q1 2024 (see chart 2, right), to 400bps for a single B loan and 280bps for a double B term loan B, while yields declined to around 9%.
The burst of refinancing activity has made the proportion of loans issued at par rise to 45% of the total, up from 1% of all deals as recently as the second quarter of 2023.
2: Average first-lien institutional loan margins (bps)
Source: Debtwire
Only so much can be refinanced
This level of activity cannot be sustained for a long period. The maturity wall spikes in 2028 at USD 610bn, with USD 867bn due prior to 2028. If the Q1 2024 quarterly refinancing volume continued, all outstanding loans would be refinanced within the next two years.
While refinancing dominated issuance in Q1 2024, quarterly new money issuance of USD 40bn from 67 deals is still at its highest point since early 2022, although this figure is still some way from regular historical volume and only narrowly exceeds volumes raised in Q2 2020 and Q3 2020.
USD60bn
Year-on-year rise in high yield bond issuance for Q1 2024
Part of this new money issuance comprised six dividend recaps in March, from Monotype Imaging, Bakelite, SunSource, Kindercare, Citrix System and ZVRS. This adds to the six in February and three in January to total USD 7.5bn year to date (chart 3).
While primary activity has been incredibly strong, secondaries have moved little this year and March has been no exception. The weighted average bid on institutional term loans stands at 95, having moved relatively little since May 2022.
3: US institutional dividend recap issuance ($bn)
Source: Debtwire
Default numbers continue to increase
Despite the positive outlook on the market, defaults have continued to climb, with loan defaults rising to 3.79% for the trailing 12 months, according to Fitch Ratings. To date, the 3.7% default rate in 2024 represents the second highest default rate since the global financial crisis. It is outpaced only by 2020’s 4.5% rate.
CLO issuance remained steady. 19 were raised in March, reaching just shy of USD 10bn — a relatively average performance given historical standards, and down from last month’s USD 20bn from 43 issuers.
CLO pricing has materially reduced, falling to 155bps for triple A tranches and 690 for double B tranches, down from 212bps and 898bps respectively in Q2 2023.
USD610bn
Total size of the 2028 institutional loan maturity wall
Bonds near double year on year
High yield bond issuance is up 82% year-on-year to USD 60bn, on the back of rises in both new money and refinancing activity. The high yield bond universe has even seen a rise in M&A activity, with USD 6.35bn raised to date in 2024. So far in 2024, no bond-backed LBOs have made their way through the market.
Dividend recaps are also featuring in the bond market, with USD 4.25bn raised from HUB International and Caliber.
Like the loan market, secondary bonds have stagnated thus far in 2024, sitting at 7.5% due to a lack of trading.
Where loans and bonds differ is in the outstanding debt in the market. The maturity wall in the bond market is far flatter than the loan metric, with the peak in 2029 of USD 273bn, a further USD 235bn due in 2028 and USD 514bn prior. Given the relative sizes of the markets, bonds have a far more imposing maturity wall risk than institutional loans.
The average yield to maturity has dropped to 7.5%, the lowest level since Q1 2022, spurring bond activity. On a more positive note, bond defaults have remained at around 3% since November, according to Fitch Ratings.
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