On the news
- Although investors and other market participants continue to be selective, the US mortgage market saw an improvement in November, with a slight uptick in primary loan issuance largely due to refinancing activity. In the syndicated loan market, pricing flex favored borrowers in November with no rate increases and 15 cuts, and the average settlement spread on new single B-rated loans fell to S+564 (from S+728 in October). LBO activity remained scarce in November with only one broadly syndicated acquisition announced in November for Nielsen Holdings. For a deeper dive into various segments of the middle market, this Covenant Review Middle Market TrendLines data report covers calculations and covenant terms for the LTM period ending 10/31/2022.
- Despite this slight thaw in debt markets, creditors remain hesitant to buy into new deals for borrowers who do not have higher quality ratings. As a result, promoters have scrapped or withdrawn planned syndications and have had to keep acquisition loans on their balance sheets. As of November 28, 2022, Bloomberg estimates that banks in the U.S. and Europe have approximately $42 billion in such “hanged” debt—debt that in many cases was taken out before the market tightened, and that organizers are keen to move from their books before. end of the year.
- Arrangers have had some success in offloading their LBO debt in the recent market meltdown, albeit at a steep discount. This trend has opened the door for flexible financial buyers, who have bought loans for their portfolio companies to take advantage of the increased yield on such debt.
- The Federal Reserve Bank raised its benchmark interest rate by another 50 bps yesterday, bringing the total to a range of 4.25% – 4.5%. While this marks a smaller increase than the previous four 75bp hikes, the Federal Reserve projects that it will continue to raise interest rates into 2023, likely to peak between 5.0% and 5.5%.
- As companies prepare for a potential downturn, many are looking to raise or expand the capacity of revolving credit facilities to provide a cushion in case liquidity becomes a problem, much like the activity we saw at the start of the pandemic. Similarly, although new issuance in the syndicated term loan market remains low, companies have had some success closing amendment and extension transactions, particularly in the ratio space involving term A and revolving facilities. Private equity funds have also turned to net asset value (NAV) loans – which allow sponsors to borrow against the equity value of their portfolio companies – as a source of liquidity at a time when more conventional loans are hard to come by. terms.
- Volatility in the collateralized loan market is again creating stress in the collateralized loan obligation (CLO) market, with valuations for CLO debt already significantly down for the year with further falls expected. In addition, investors are bracing for the impact of expected additional defaults and downgrades, particularly for low-rated companies in the consumer goods, healthcare and entertainment industries.
- The long-awaited 2022 Uniform Commercial Code (UCC) amendments, which add a new Article 12 that provides a framework for commercial transactions involving virtual currencies, distributed ledger technology and other technological developments (including details on how to perfect a security interest in such security), has been published and is now being sent to the states for adoption. The Uniform Law Commission has a tracker on its website for where the changes have been introduced in state legislatures and where they have been passed.
In the first edition of Debt Download, we covered recent trends in the US debt financing markets. This month we take a look at what’s happening in the UK and Europe.
- Conditions in the UK/European debt markets remain in their challenging post-summer mode, with many investors risking out to the end of the calendar year (as has been the case for most of Q3 and Q4). Some small and mid-market deals are still being done, but more “creativity” and “flexibility” for both sponsors and lenders are the watchwords in this area.
- Activity is very muted in the broadly syndicated loan and high-yield bond markets, driven by fundamentals and a lack of CLO issuance, as European CLO new issuance is reportedly down nearly 35% year-to-date.
- Earlier today, the Bank of England and the European Central Bank raised interest rates by a further 50 bps.
- With an eye on 2023, bankers will look for deals for credits maturing in 2024 and 2025 – there is speculation that the market could revive the “forward start facilities”, which were briefly popular during the financial crisis as a way to lock in committed funding before maturity .
- There is generally no consensus view on the path of the leveraged loan market in 2023 given the stressed macro environment (including persistent inflation in the Eurozone and the UK). Optimists will point to a lot of dry powder with credit funds and other institutional investors – only time will tell.