RLPC: 2012 US HY capital markets hit $991B record

Fri Dec 28, 2012 11:26am EST

* Leveraged refinancings post record loan volume

* Leveraged new money is up 36 percent in 2012

* Leveraged pro rata lending hits all-time record

* Investment grade is down 28 percent

By Ioana Barza

NEW YORK, Dec 28 (Reuters) - U.S. high yield capital markets issuance hit an all-time record of $991 billion in 2012, beating 2007's $777 billion and comprising of a record $327 billion in high yield bonds and $664 billion in leveraged loans, according to Thomson Reuters LPC.

Largely driven by refinancing activity, leveraged lending saw its second-busiest year, falling just below the 2007 peak of $688.5 billion. Banks, with appetite particularly for BB rated credits, committed an all-time record of $329 billion, while institutional loans made up the remaining $335 billion.

On the back of muted volatility and strong technicals, leveraged refinancings hit a record $380 billion as issuers took advantage of strong investor demand. Sources said this figure will decline in 2013 as upcoming maturities have been addressed and tax-driven transactions have worked through market.

M&A financings, however, are expected to grow. At $284 billion, new money transactions are up 36 percent from 2011, although this figure sits far below 2007's record $472 billion. Notably, dividend recap financings reached a record $47 billion in 2012, far outpacing 2010's $30 billion. The pickup was dramatic in the fourth quarter, which registered $20 billion in dividend recaps alone.

Leveraged M&A volume also picked up in the fourth quarter, reaching $63 billion, relative to $33 billion in each of the first three quarters. Leveraged buyout leverage levels crept up to 5.74 times in 4Q12, up from 5.71 and 5.50 times in 3Q12 and 2Q12, respectively, while equity contributions dropped to 35 percent on average in 4Q12 with deals much lower at the margin.

Interest in leveraged loans grew from non-traditional investors such as pension funds, insurance companies and endowments via separately managed accounts. Nearly $12 billion also came in via retail fund flows, according to Lipper. The most obvious sign of strong investor demand came from $54 billion in new collateralized loan obligations (CLO) in 2012, more than the prior four years combined. CLO managers expect another $75 billion in CLOs in 2013 supported by an expanding investor base and tightening CLO liabilities spreads.

Despite the jump in leveraged lending, U.S. syndicated lending fell to $1.6 trillion in 2012, down from 2011's $1.8 trillion, as lending to investment grade companies dropped 28 percent to $610 billion from 2011's record as refinancings slowed and M&A financings fell 38 percent to $79 billion, with the $14.5 billion financing package backing Abbott Laboratories' separation into two publicly traded companies marking the largest deal of the year. Momentum picked up as the year wound down and an additional $25 billion in M&A financings are still in market heading into 2013, including a $12.5 billion loan package backing Freeport-McMoran's acquisition of Plains Exploration & Production Co and McMoran Exploration.

With banks in varying stages of Basel 3 migration, investment grade pricing is expected to remain stable. "None of the headwinds banks are facing suggest pricing would come down anymore," said one continental European lender.

One U.S. lender added, "We're really seeing people put discipline around their models that have been evolving for Basel 3. We're operating under Basel 3, running our business that way, and have procedures continuing to be developed and enforced in terms of how we look at discipline around returns and use of capital."

While a long list of regulatory issues pose the biggest challenge to the U.S. investment grade and leveraged markets, syndicate heads and buyside institutions surveyed by Thomson Reuters LPC see a build up in the M&A pipeline as the biggest opportunity in 2013. The majority expect a 25-30 percent pickup as both corporates and strategics are poised to pursue new transactions.