| NEW YORK
NEW YORK Jan 13 U.S. leveraged loan issuance
may hit $1 trillion in 2014, the second-highest level on record,
following the all-time high $1.14 trillion issued in 2013,
according to loan market participants surveyed in Thomson
Reuters LPC's Quarterly Lender Survey.
Issuers will continue to take advantage of low borrowing
rates and robust loan demand to cut costs and extend maturities,
according to banking sources. However, issuance is expected to
expand from repricing and refinancing into other uses of
proceeds, including mergers and acquisitions (M&A).
Nearly 70 percent of loans were earmarked for refinancing or
repricing in 2013.
"With the maturity wall having been pushed out, and a lot of
the opportunistic refinancing having occurred, it's doubtful
we'll reach 2013 highs," said Leland Hart, head of the bank
loans team at BlackRock. "But that said, it's easy to continue
to refinance loans, and it's nice to see that M&A is starting to
pick up, and that should provide a new source of fresh capital
needs from borrowers."
Enhanced credit profiles, an uptick in capital expenditures
from low levels in 2013 and a low default environment are also
expected to support another year of healthy loan issuance.
Insatiable leveraged loan demand in 2013 largely stemmed
from investors starving for yield and aiming to hedge against an
eventual rise in short-term interest rates.
While the Federal Reserve has set expectations for measured
tapering in 2014, estimates vary across Wall Street for when the
Fed will fully complete its asset purchases, or when the Fed
will begin raising short-term interest rates. Timing uncertainty
around rates and potential market response are expected to
continue supporting demand for the floating-rate leveraged loan
Strong demand trends led to a borrowers' market in 2013.
In addition to the waves of repricing, issuance included a
record $311 billion in institutional covenant-lite loans that
more than tripled the prior record, according to JP Morgan.
Covenant-lite loans offer less protection for investors.
The effect of new collateralized loan obligation (CLO)
regulations on the leveraged loan market is a wild card. Risk
retention rules outlined by the Dodd-Frank Act may chill the CLO
market by lowering their demand for new loans.
However, CLO issuance could be pulled forward in 2014,
according to a Barclays report, as these requirements would only
become effective two years after the final adoption of the
A Citi report says that Fed and Office of the Comptroller of
the Currency (OCC) regulatory pressures on banks to increase
lending standards could weigh on loan issuance this year.
Regulatory pressures may restrict private to private leveraged
buyout (LBO) deals more than public to private LBO transactions
in 2014, given that the former carry higher leverage.
"Deteriorating lending standards have caught regulators'
attention, particularly in the loan market," the Citi report
said. "We believe this will shift some lower-quality (loan)
supply to the bond market if the use of issuer-friendly features
(such as covenant-lite packages) is more closely regulated."
However, Hart notes that the OCC suggestions may be positive
for investors, as it helps reel in looser structures from
"The average deal of today is still better than the average
deal of 2006 or 2007," said Hart. "When you have things like the
OCC coming in and making suggestions around underwriting
standards, that will actually be a positive force in future
performance of loans."
By the numbers
Citi analysts in a December research report expected loan
supply down 15 percent, as the regulatory focus on lending
standards drives some issuers out of loans into the bond market.
JP Morgan forecasted institutional loan issuance, which
includes loans marketed to institutional investors, will drop
roughly 35 percent in 2014 given the hefty volume of loans
already refinanced or repriced in 2013.
Bank of America Merrill Lynch forecasted a roughly $10
billion uptick in gross institutional loan issuance in 2014
(excluding repricings), versus 2013, supported by a pick-up in
M&A and LBO activity this year offsetting lower refinancing
In a December roundtable, Barclays noted continued demand
for the leveraged loan asset class driven by rising interest
rates and strong technicals. Barclays anticipates roughly flat
leveraged loan volume in 2014, again given significant
refinancing loan volume already pulled forward into 2012 and