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2Q17 Loan Review: Top-line & Bottom Line

July 6, 2017 - 2Q17 headline leveraged lending volumes remained astonishingly high. But, of course, the real story is more nuanced. As in recent quarters, refinancings dominated the action, real supply was more modest and demand remained very solid.  We discuss all these trends – and what they meant for deal terms – below. 

First, the top-line figures (which vary – dramatically – based on data collection methods): In the overall leveraged loan space, TR-LPC observed $333 billion of second quarter issuance and S&P/LCD saw $159 billion of issuance. In the institutional space, TR-LPC calculated $207 billion of gross institutional loan issuance, LevFinInsights captured $249 billion of “priced” deals and LCD tracked $125 billion of gross issuance. 

But while those topline figures may be eyepopping, there is less than meets a popped eye. First, refinancings accounted for over half of all lending activity, even as repricing activity declined from 1Q17’s record level. Consider LevFinInsight’s deal volume: First quarter saw $338 billion of “priced” institutional deals, with $279 billion (82%) being associated repayments. Second quarter saw $249 billion of priced institutional deals, with $179 billion (72%) being associated repayments.  Thus, net priced volume was higher in second quarter ($69.7 billion) than first quarter ($59.8 billion). 

The S&P/LSTA Leveraged Loan Index agrees that there was (slightly) less sound and fury and (slightly) more real action in 2Q17. Despite lower nominal issuance, outstandings of priced loans in the Index grew by $49 billion across the past three months, bringing it to a record $925 billion. Including unpriced loans, outstandings hit $943 billion.  chart_070717vs2-1 (Indeed, the Chart of the Week demonstrates the fallacy of using “new issue” as a proxy of supply. The Index’s growth trajectory was steepest in 2014 and 2Q17, not in the periods of the strongest nominal loan issuance.) 

Real loan growth was partly due to the return of LBOs. LPC and LCD tracked $26 and $31 billion, respectively, of LBO lending in second quarter. This is up materially from 2Q16, even with today’s purchase price multiples around 10x and Leveraged Lending Guidance constraining the amount of debt buyouts could bear. So how did sponsors make this work? By pushing leverage multiples and bringing a boatload of equity. On the leverage side, LCD (using adjusted EBITDA) saw the share of large LBOs with debt/EBITDA of at least 7x climb from 4% in 2016 to 14% in 2Q17. TR-LPC, meanwhile, pegs the 7x share at more than 30%. But at the same time, sponsors also are putting in 41% equity checks. (For context, in 2007 – when PPMs also hit nosebleed heights – equity checks sat in the 30% range.)

While real net supply was materially higher than first quarter, net visible demand was modestly higher. True, CLO issuance accelerated to $35 billion, doubling first quarter’s volumes. But, conversely, loan mutual fund flows decelerated sharply, totaling just $3.5 billion in second quarter, according to TR-LPC. In turn, supply and demand were better balanced in second quarter – or, at least, less imbalanced – and this showed up in secondary and primary pricing stats.  In the secondary, prices were mostly flat (in the 98.2-98.3 context) until early June. But then, with retail and energy softening amid a general investor pushback, secondary prices slipped to end the quarter at 98.02. 

The primary loan market saw a similar trend.  Flex activity decisively favored issuers in March (with 55 reverse flexes to five upward flexes) and April (with 42 reverse flexes to 12 upward flexes), LevFinInsights tabulated. But with spreads contracting as far as CLOs could bear, several sectors wobbling and technical imbalances easing, investors gained leverage. In turn, by June, there were 35 reverse flexes to 28 upward flexes. And while all-in spreads remained flat in the LIB+240 context for BB/BB- issuers, it was a different story for more storied credits. In the B+/B rated space, all-in new issue spreads ended the quarter in the LIB+383 context – up 20 bps from their May lows, according to LCD stats. The question, of course, is can this last?

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