January 6, 2022 - “Banner Year” was the nom du jour in the year-end primary market recaps. 2021 was defined by record supply, record demand, (near) record low default rates and, of course, the end of the benchmark that defined loan pricing for decades. What’s more banner than that?

Starting with deal flow, Refinitiv LPC, S&P/LCD and LevFinInsights (LFI) all saw leveraged loan volumes doubling (or close to it) in 2021. Refinitiv LPC’s leveraged volumes hit $1.3 trillion (up 84%) and institutional lending jumped 98% to $790 billion. LCD’s leveraged lending doubled to $789 billion, while institutional volume climbed 113% to $615 billion. Likewise, LFI’s priced institutional deals doubled to $831 billion. So, grossly speaking, there was a lot of flow.

But with substantial refinancing associated with the deal flow, outstandings grew more slowly. S&P/LSTA Leveraged Loan Index outstandings increased by $175 billion (13%) to a record $1.32 trillion. One reason the syndicated loan market didn’t grow even faster might be traced to private credit. In addition to new issues that went to the private credit market, LFI tracked eight BSL deals totaling $7.5 billion that were refinanced into direct or club-style loans and another two that exited into privately financed LBOs. Refinitiv LPC reported that the market is growing enough and default rates are benign enough that “the syndicated market and the direct lending market can co-exist without pain right now”, but if growth slows or defaults spike, “the two markets would be more in conflict.”

While supply of loans hit records, so did demand. CLO issuance was, of course, breathtaking. LCD tabulated more than $186 billion of CLO issuance, doubling 2020’s take and up 45% from the previous record set in 2018. In addition to a mainstreaming of the asset class and an attractive arbitrage, CLOs may have also seen a modest “pull forward” effect, whereby early 2022 deals priced in 2021 to avoid becoming the inaugural SOFR CLO.  Meanwhile, loan mutual funds enjoyed more than $46 billion of inflows, reported Refinitiv Lipper, reversing their multi-year outflow streak.

While volumes were high across the board, defaults were low, low, low. According to Fitch, the leveraged loan default rate ended 2021 at 0.6%, the lowest level in a decade. Similarly, LFI reported that after a brutal 2020, the CS Loan Index saw 448 upgrades vs. 171 downgrades in 2021.

Strong lender appetite and low default rates can naturally lead to more leverage and lower ratings (more than 40% of new issue loans were rated B- by one agency, wrote LCD), looser documents (Covenant Reviews Documentation Scores worsened to 3.81, from 3.55 in 2020) and attractive pricing. Indeed, with monthly B+/B TLB margins ranging from L+355-417 in 2021, loan spreads were above pre-Pandemic levels. However, even with 50+ bps LIBOR floors prevalent, loan absolute rates hovered in the 4% range, below pre-Pandemic levels, according to LCD.

Of course, the most interesting pricing trend wasn’t LIBOR margins, but the transition from LIBOR itself. After the ARRC recognized CME Term SOFR for use in business loans and related securitizations in July 2021, the stage was finally set for SOFR loan origination. Between October and December 7th, LCD tracked $18 billion of SOFR loan origination tied to 24 borrowers. Deutsche reported that roughly $3 billion in SOFR loans have been spotted across 780 CLOs. But that’s just the institutional space – and just the tip of the iceberg; Refinitiv tracked 43 leveraged and IG SOFR deals. Moving into 2022, SOFR is (mostly) the name of the game and a number of SOFR loans have launched this week. (Several LIBOR deals emerged, but those typically are transactions that were underwritten in 2021 and are being sold this year.) So, what’s next? Once new issue SOFR conventions and mechanics coalesce around norms and the pipeline is moving smoothly, the loan market must shift its focus to transitioning the trillions of dollars of legacy LIBOR loan exposure.  But how hard could that be?

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