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Wave of new US leveraged loans sweeps into the thirsty credit market
by Lisa Fu
Never mind interest-rate uncertainties and geopolitical risks. Over the past month a wave of new US leveraged loans swept its way out of banking offices and was, by all accounts, eagerly absorbed by a thirsty credit market.
It turns out financiers had been busy over the summer finalising a flurry of deals that had been backing up in the loan pipeline, as resilient demand finally overrode lingering concerns about the investment climate or policy outlook. The pace of issuance could peter out from here, and prices of broadly syndicated loans (BSLs) in the secondary market are already starting to signal a slowdown.
But business has been undeniably brisk of late. Market sources have reported a spike in new leveraged loans over recent weeks, with some saying the visible supply of sub-investment grade credit had reached its highest level in nearly two decades. One US banker cited more than 50 deals in a four-week period over the summer. Meanwhile, Creditflux’s sister publication Debtwire reported that the European M&A pipeline across loans and bonds had reached a five-year peak.
Loan appetites remained robust in September even as the US Federal Reserve raised rates for the first time since 2023, Treasury yields spiked to multi-year highs and uncertainty swirled about the Iran war, prompting JPMorgan’s commodity team to admit it was struggling to model oil prices.
Activity stalled earlier in the year on similar factors, but the pressure to make deals eventually won out, as the market got more accustomed to an outlook for higher interest rates operating with the uncertainties, according to Mike Talaga, global head of credit research at Janus Henderson Investors. “People went pencils down [earlier this year] and now we’re seeing deals that were in the pipelines start to happen,” he told Creditflux. “There’s a lot of pent-up supply.”
The tone was set by a USD 2.1bn leveraged loan to back KKR’s acquisition of medical device company Integer Holdings. Launched on 8 September, the dealwrapped up within three days at 250 basis points over the Secured Overnight Financing Rate (SOFR) and sold at par, versus a marketed price of 275 to 300 bps over the benchmark and 99.50 cents on the dollar, as Debtwire reported. Other credits were quickly launched and absorbed, including a much-anticipated Paramount Skydance deal and financing for Veritas Capital’s leveraged buyout of BGIS, a facilities management company.
Software-related success
A senior banker at a leading capital markets firm said the workload for acquisition finance and leveraged buyouts was the busiest it had been for some time. Despite the dealmaking surge, some market sources say overall issuance still lags behind last year’s levels, with lenders taking a selective approach to certain industries, especially software.
But even some software deals have managed to get over the line, helped by concessions on pricing and premiums, while secondary loan pricing has recovered from a battering earlier this year over fears of industry damage from AI.
Take for example Sophos, a UK-based software company backed by private equity firm Thoma Bravo. It pulled off an “amend and extend” deal after increasing the euro-denominated loan in the package and shrinking the privately placed payment-in-kind (PIK) facility in dollars, as reported by Debtwire.
There’s a lot of pent-up supply.
Mike Talaga
Global head of credit research
Janus Henderson Investors
More software-related credits are expected to test the waters in the coming months. With prospects for a sustained period of higher interest rates, more investment capital is being channeled into fixed income, driving demand for leveraged loans and the investment vehicles that bundle them into securitised assets, market participants say.
“If you just look at the broad fixed income market, the need for reinvestment is up materially from the last five years,” said Edwin Wilches, managing director and co-head of PGIM Credit’s securitised products team. “It’s true in investment grade, high yield, everything else.” He estimated that up to 400 warehouse facilities at around 20 arranger banks would be looking to buy loans for incorporating into collateralised loan obligations (CLOs). Demand was predicted to stay strong as the loans can offer attractive returns relative to their risk for CLO investors.
But with so many deals in quick succession over the past month, the momentum may inevitably flag through the end of the year. The forward pipeline is likely to shrink to a handful of deals driven by the buildout of AI infrastructure and data centres, according to one US banker, who said lenders will need to adopt competitive tactics to replenish financings for leveraged buyouts and corporate M&A.
Moreover, the secondary BSL market is signaling a potential downturn. The Morningstar LSTA US Leveraged Loan Index looks to have peaked out in mid-September and is trending downwards as Creditflux goes to press. After climbing from a low in early March, the index was still up 3.29% year-to-date at the start of October but had slipped 0.32% over the past week.
