Welcome to Debt Download, Goodwin's monthly newsletter covering what you need to know in the leveraged finance market. Enjoy the holiday season.
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In the News
- The broadly syndicated loan (BSL) market entered December on a tear, with a record $74.3 billion launched in the first three business days of the month, a figure dominated by repricings. Activity slowed down toward the middle of the month "as issuers get ready for the winter break before returning to the markets in what is expected to be a robust January for primary issuance." The month through December 13 saw $161 billion in new loans, or $17 billion net of associated repayments, according to Covenant Review. The average all-in single B spread dropped to S+335 (S+331/99.9 OID), which was the lowest we've seen in almost five years. The market continued to heavily favor borrowers on flex terms, with 28 pricing cuts to one pricing increase, for a 9.3:1 ratio. LCD expects refinancing activity to favor the private market in 2025, as borrowers repay BSLs with more competitively priced direct loans, continuing a strong trend we have seen and written about in prior Debt Downloads throughout the year. LCD calculates that up to $50 billion in loans may migrate from the Morningstar LSTA US Leveraged Loan Index to the private sector in 2025, compared with $21.3 billion this year.
- The European BSL market joined the US markets in reaching record repricings for the year, with €73.9 billion in loan facilities repriced via amendment through the end of November. New-issue volume was also strong, with €10.4 billion in November, the third-busiest month of the year. This activity was enough for the Morningstar European Leveraged Loan Index to grow to €300 billion for the first time ever. LCD reports that "there is still room in the market for more repricing activity," with €14.5 billion in debt priced at 425 bps or higher and without any call protection. M&A activity has been "relatively subdued," though there is hope for a turnaround on this front as "M&A activity has been improving from quarter to quarter."
- BlackRock agreed to acquire HPS Investment Partners for $12 billion in a transaction that is expected to close mid-2025. The tie-up will result in a $220 billion private credit unit led by HPS executives. This is part of a recent trend in which private credit lenders, such as Blackstone and Blue Owl Capital, are looking to attain "scale ahead of [an] expected M&A wave," according to Bloomberg. In another avenue of expansion, BlackRock, KKR, Capital Group, Apollo and State Street are launching public-private debt funds targeted to retail investors, with private credit interval funds already gaining traction among retail investors and exchange-traded funds not far behind.
- Private lenders are increasingly exercising rights to gain control of distressed borrowers, according to the Wall Street Journal. Private lenders have typically been the go-to providers for rescue capital but have later found themselves saddled with debt that they can't off-load to other lenders. Instead, they have begun "using rights granted in the credit agreement to control the direction and outcome of the process," according to managing director and U.S. turnaround and restructuring leader at Deloitte. This includes exercising board rights to install independent managers to direct the workout of the borrower. These tactics are generally explored in a stand-off between private credit and private equity, though "even less contentious guys are looking into it," according to the article.
Goodwin Insights – Year in Review (UK and Europe)
- In November, the Bank of England cut interest rates for the second time this year to 4.75%, which is their lowest point in more than a year. While the Bank of England held rates steady at its meeting on Thursday December 19, 2024, as expected, further reductions are predicted to come in 2025. As rates further reduce, a greater number of borrowers may look to debt funding as an option, especially where high interest rates had previously been a factor in delaying acquisitions or refinancings.
- With private equity firms having enjoyed fewer opportunities to exit their investments in recent years and valuation gaps between buyers and sellers beginning to narrow, there is cautious optimism that there will be an uptick in M&A activity with large amounts of dry powder waiting to be deployed. Coupled with the reduction in interest rates detailed above, it seems that debt will not continue to be an impediment towards an increase in M&A deals.
- Portability provisions, where companies can carry over existing debt arrangements on a change of ownership, are beginning to return in leveraged finance transactions in Europe. As participants anticipate an increase in M&A activity the inclusion of portability ahead of a sale can prove attractive to a potential purchaser who may not wish to enter the debt market to refinance existing indebtedness.
- While the general consensus is that there will be an upward trajectory for the leveraged loan market in 2025, fears around persistent inflation (despite the recent and projected reduction in interest rates) do linger in the Eurozone and the U.K., layered with a degree of political uncertainty in Europe and U.S.
In Case You Missed It – Check out these other recent Goodwin publications: Extending Fund Lifespans: Typical Durations and Consent Requirements; Six Hot Trends in Life Sciences for 2025; Evaluating Your Large Accelerated Filer Status This Year; Preliminary Injunction Halts Corporate Transparency Act Enforcement: What You Need to Know; Year-End Tool Kit for 2024-2025; Money20/20 Zeros in on AI, Open Banking, and Payment Innovation; CFPB Issues Final Rule to Supervise the Largest Nonbank Companies Offering Digital Funds Transfer and Payment Wallet Apps
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
