March 29, 2018 / 9:08 PM / a year ago

U.S. leveraged lending sags, high-grade rises in first quarter

NEW YORK (LPC) - US syndicated lending in this year’s first three months was the lowest of any quarter since the one ending September 2016, after setting record issuance for all of 2017, with leveraged loans to highly indebted borrowers sagging while loans arranged for top quality companies climbed.

The US$517.6bn of loans arranged in the first quarter, down from US$604.4bn in the same quarter last year, was the least since US$440bn in the third quarter 2016, according to Thomson Reuters LPC.

Some of the bigger leveraged deals, including the US$13.5bn loan and bond financing backing Blackstone Group’s purchase of a majority stake in Thomson Reuters’ Financial and Risk (F&R) unit – the largest buyout financing since the financial crisis – have yet to launch or be tallied in these volume figures.

The F&R unit includes LPC.

Bankers are hopeful that this year’s newly lowered corporate tax rate to 21% from 35% will help free up companies for more acquisitions and related financing.

The prospect of more US Federal Reserve interest rate hikes this year and next will also keep borrowers refinancing existing debt before rates rise further, boosting loan volume, bankers said.

“Our current pipeline is probably four to five times busier than in mid-January,” said Brendan Dillon, global co-head of leveraged finance and capital markets at UBS. “This bodes well for a robust second quarter and likely third quarter.”

In the first quarter, US$269.3bn of leveraged loans were arranged in 718 deals, a drop of about 33% from the US$404.8bn in the same period last year from a fewer 618 issues.

Around two-thirds of the leveraged loans made in the first quarter were for refinancing purposes.

In 2017, when a late-year burst of mergers and the torrid pace of refinancing pumped US syndicated lending to an all-time high of US$2.5trn, the same two-third share of highly indebted borrowers repriced deals to lock in more favorable terms before rates increased.

Among highly rated companies, syndicated lending of US$197.8bn in the first quarter from 89 deals gained 38% from US$143.3bn in 88 deals a year earlier.

“Tax reform has been a real shot in the arm for many companies in terms of lowering their costs of doing business, and making it more compelling to consider doing acquisitions,” one senior banker said.

Bankers are eager to put capital to use especially after the biggest committed loan financing ever — a US$100bn bridge loan arranged by a dozen banks to back Broadcom Ltd’s US$117bn takeover of Qualcomm Inc – fell away after US President Donald Trump earlier in March blocked the chipmaker deal over national security concerns. 


While leveraged loan volume slid, investor demand didn’t, allowing for borrowers to keep on pricing deals aggressively.

Investors kept clamoring for floating-rate assets, which are pegged to a rising Libor benchmark. That demand has dragged down yield spreads.

“The first quarter was all about one thing: loan spread compression – lower and tighter spreads,” said Michael Nechamkin, senior portfolio manager and co chief investment officer at Octagon.

Three-month Libor, at 2.31%, has jumped from about 1.70% at the year’s start and is the highest since the financial crisis. One-month Libor at 1.88% is up from 1.56%.

“Libor moved up so fast that despite the spread compression, the average coupon is still higher than three or six months ago,” Nechamkin said.

While average leveraged loan spreads of 3.3% in the first quarter were the lowest since the third quarter of 2007, average yields jumped to 5.42% in the first quarter from 5.02% at the end of last year, LPC data show.

“For the last six months loans have outperformed high-yield bonds consistently month after month for the first time in well over 10 years,” said John Fraser, head of Investcorp Credit Management US. “Loans have also dramatically outperformed investment-grade bonds.”

Collateralized Loan Obligation funds, the biggest buyers of leveraged loans, could intensify their purchases, with more capital freed up now that they are exempt from “skin in the game” requirements to hold 5% of their funds’ risk.

Retail investors, meantime, have pumped in a net US$3.5bn into loan funds this year through March 21, while yanking out almost US$19bn from high-yield bond funds, according to Lipper.

“Loans do benefit from rising interest rates,” said Fraser. “Increases in Libor year to date have more than offset spread compression, so investors are realizing an improvement in yield and market prices have held up.”

Reporting By Lynn Adler; Editing By Michelle Sierra, Leela Parker Deo

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