January 25, 2018 - Friday morning, LSTA EVP Meredith Coffey presents at Allied Irish Bank, discussing where we were in 2017, where we are today, and what may be on tap for the next 11 months.
Where we are today appears to be a continuation of 2017: Technicals strongly supportive of borrowers and terms and conditions moving in their direction. TR-LPC tracked 23 structural and price flexes in January month – and 22 were in borrowers’ favor. LevFinInsights, meanwhile, says there has been nearly $32 billion of repricings sighted in January, up from $15 billion in December.
Is this what folks expected? Single-B spreads were expected to drop around 10% across all of 2018, while BB spreads were expected to be flat. But while spreads may drop, “coupons” might not, thanks to LIBOR’s continuing rise. TR-LPC points out that the average primary yield on January’s first-lien institutional loans was at its highest level since 2Q16. But that was almost all three-month LIBOR, which has increased nearly 70 bps in the past year.
On the volume front, respondents to a December TR-LPC poll expected institutional refinancing to fall by half, and new institutional lending to be flat. Could 2018 turn out a bit better than that? Some lenders say M&A activity might pick up as corporate chieftains become more bullish on the economy, have more money in their pockets due to tax cuts, and see reduced regulatory red tape. To be fair, some of these benefits accrue more to corporates than to sponsors. Non-sponsored companies tend to pay more tax (and may benefit more from tax cuts) and have lower interest expenses (and may be unaffected by interest deductibility limitations). This might advantage corporates over sponsors in 2018’s M&A game. In some cases, it could lead to more BB credits than B rated loans. In other cases, investment grade companies might do the acquiring, skipping the leveraged loan market altogether.