NEW YORK, June 30 (Reuters) - Low-rated companies, rushing to slice borrowing costs with interest rates low and demand for higher-yielding assets elevated, drove US leveraged lending to a first-half record and in turn propelled total US syndicated loan issuance to an all-time high for any half-year period.
The US$732.2bn of leveraged loans issued in the first half, a 92% spike above the US$380.7bn during the same time a year ago, boosted overall syndicated volume to US$1.22trln, according to Thomson Reuters LPC.
Total volume leaped almost 20% from the prior half, 27% from the year-ago half, and 14% from the previous six-month high set in the first half of 2014.
Leveraged loans to companies cutting expenses and improving terms far overshadowed lending to support mergers and acquisitions.
Bankers say M&A activity will ramp up as the legislative logjams around US healthcare, tax and trade policies are broken.
“The second half should be more of the same in terms of volume, but the composition could change to a lower percentage of refinancing and more M&A, assuming things normalize a bit,” said Art de Pena, managing director and head of distribution, trading and agency at MUFG’s syndications group.
“That will be a function of, hopefully, political stability, that will help to spur M&A and economic growth,” he said.
In the meantime, issuance has been skewed by borrowers that often returned to the leveraged loan market repeatedly within months to get more favorable pricing with limited investor push-back until recent weeks.
Less than 30% of the leveraged loans issued in the first half of the year represented new financing.
A reluctance of corporations to pull the trigger on big M&A deals without more clarity on tax, trade and other legislation has also pressured lending to investment-grade companies.
“The likely M&A catalyst in investment grade would be policy certainty — lower corporate tax rates, repatriation etc — coupled with a continuation of the current environment of slow revenue growth, high equity markets, low volatility and low interest rates,” said Matthew Daly, head of credit research at investment management firm Conning.
“Certainly the debt markets are very accommodative right now for financing.”
Companies that did announce mergers were less likely to face antitrust rulings that scuttled several major US insurance company tie-ups earlier this year. A push for growth in a slow growing economy was the incentive to acquire a rival or a company with a complimentary line of business.
The US$371.8bn of investment-grade loans issued in the first half was about 18% lower than the US$451.9bln in the first half of last year.
Lending volume kicked up a notch after US drug distributor Cardinal Health Inc in April announced a deal to buy Medtronic Plc’s medical supplies unit for US$6.1bn, agreeing to a US$4.5bn bridge loan before locking in longer-term debt.
“Most of the deals have been tack-ons or tuck-ins, which reflects the fact that equity values are at all time highs and companies are skittish about entering into a merger agreement with the legislative uncertainty,” a senior banker said.
Now, lenders are assessing whether Amazon.com’s late June deal to buy upscale grocer Whole Foods Markets for US$13.7bn, to be supported by a bridge loan of up to the same amount not yet included in the issuance tally, can light a fire under other dealmakers later this year.
“A lot of people are taking a fresh look at A + B = C, meaning what can you combine with a tech company to have a leg up and a marketing advantage,” the banker said. “I would suggest that’s not just limited to supermarkets, it could be any number of different products.”
With demand surpassing supply, arrangers are boosting debt taken to back large leveraged buyouts to levels last seen in the final quarter of 2014, according to LPC.
Expectations that the Trump administration could loosen leveraged lending guidelines, updated by regulators in 2013 to thwart potential systemic risk, are also enabling leverage levels to creep higher.
Total leverage on broadly syndicated large buyouts averaged 6.39 times total debt to Ebitda in the second quarter.
That tops the 6 times level that draws regulatory scrutiny, though remains below the post-crisis peak almost three years ago of about 7 times.
Investor demand, for now, remains unrelenting.
Collateralized Loan Obligation funds, the largest buyers of leveraged loans, have issued almost US$50bn so far this year, 90% more than the same period last year. (Reporting By Lynn Adler; Editing by Chris Mangham and Leela Parker Deo)