April 11, 2024 - Technical tailwinds conspired to keep the institutional loan market open in 1Q24 – and turn it into a hotbed of activity. According to Pitchbook LCD, institutional lending totaled $325B in the quarter, a three-year high watermark and the third-highest reading in the last 10 years. But for all the volume, new supply was again scarce: 57% ($184B) was accounted for by repricings and extension amendments, and 26% ($86B) of the remainder was accounted for by refinancings (the second highest level on record, Pitchbook LCD noted), leaving the share of new money at just 17% ($55B). Still, M&A financing increased 148% (from a low base) year-over-year to $29.2B, with LBO financing hitting its highest level since 2Q22.  

The accessibility (and tightening spreads) of the broadly syndicated loan market in the first quarter offered evidence of the fluidity of the BSL and private credit markets. And deals migrated. LCD tracked 28 private credit deal takeouts by the BSL market totaling $11.8B, several of which, by ratings standards, were of lower quality (e.g., B-/B3). By comparison, 12 BSL deals totaling at least $11.1B were refinanced in the private credit market in the last four months ending March 31. Outstandings in the Morningstar LSTA Leveraged Loan Index finished the quarter at $1.377T, down from $1.397T at the end of 2023.  

On the demand side, LSEG LPC reported loan mutual funds received inflows in each month of the quarter for $4.1B in total and brisk CLOs issuance totaled $48B for the quarter. BSL deals comprised 80% ($38.29B) while private credit deals comprised 20% ($9.7B). That compares with the around 23% share private credit CLOs logged in 2023. Notably, CLOs activity was the most robust of any first quarter since the Global Financial Crisis and 45% ahead of 1Q23, Pitchbook LCD pointed out. As such, several banks revised their annual CLO issuance forecasts higher. Barclays is now forecasting $135-145B, up from $100-110B, comprising $110-115B in BSL transactions, compared to $70B originally. JP Morgan raised its forecast to $130B from $110-120B initially and BofA pushed its expectation to $145B from $110B.  

This backdrop provided a boon to loan prices, creating a stream of repricing candidates. At the quarterly high point in early January, the percentage of loans in the LLI trading above par was over 40%. According to LSEG LPC, the average new-issue yield to three-year call in 1Q24 was 9.1%, down from 9.49% in 4Q23 and 9.56% in the same quarter last year.  

The widespread repricing activity in the quarter stands to provide some relief to borrowers’ interest coverage pressure. According to Bixby Research, a Fitch Solutions company, interest coverage of their public company universe was 2.9x at December 31, down from 3.2x at March 31, 2023; interest coverage of their private company universe was 1.4x at December 31, unchanged from March 31 last year.  

But the uncertainty around timing of the Fed’s shift in monetary policy continues to cast a pall on the credit outlook. Respondents to Pitchbook LCD’s 1Q Leveraged Finance Survey expect the default rate of the LLI will be higher over the next 12 months, though lower than expectations documented in the 4Q survey. No less than 37% of respondents forecast 1Q25 will end with a default rate of 1.5%-1.99%, compared to predictions of 2.5%-2.99% at year-end 2023.

Respondents to LSEG LPC’s quarterly survey are more conservative. The majority – 67% – thinks defaults will shake out at 4% in 2024, up from 53% of respondents in the December survey. The LLI default rate was 1.41% at the end of February.  

The majority of respondents to the LPC survey expect opportunistic refinancings to drive loan deal flow in 2Q24. For a market starved of new supply, that’s an ongoing storyline that needs rewriting.