Welcome to Debt Download, Goodwin's monthly newsletter covering what you need to know in the leveraged finance market. Happy Thanksgiving!
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In the News
- The broadly syndicated loan (BSL) market continued to put up strong issuance figures in October, adding to gains made in September. On the supply side, there was $34.6 billion of new issue volume net of associated repayments, which is up from September's $27.2 billion—making the past two months the busiest of the year. Lenders made a stronger showing last month in pushing back on downward price flex, with 34 loans tightened and 6 loosened, for a 5.7:1 ratio, compared with 13.5:1 in September. The average all-in clearing spread of single-B loans was S+394 (S+381/99.6 OID), against S+373 (S+361/99.6 OID) in September. Higher-quality credits saw sharper increases, with B3/B-minus borrowers seeing a spread of S+408 (S+392/99.5 OID) in October, up from S+367 (S+358/99.7 OID) in September.
- With the October rally, the BSL market reached $1.1 trillion in annual issuance, which is 9% higher than 2017, the previous record year. Half of that amount came from repricing amendments. Since the start of 2024, 70% of outstanding loans were paid down, repriced or extended. New issues not related to refinancing accounted for only 26% of the monthly total. The European BSL markets, meanwhile, had €6.55 billion in repricing activities in October, bringing the year to date total to a record €181 billion, according to LCD. October also saw gains in new-money issues, reaching €8.65 billion for the month, of which €6.05 billion was in connection with M&A, the highest level since October 2021.
- Following the US elections, most commentaries predicted an uptick in M&A activity, including a Law360 analysis that quotes Goodwin partner Michael Kendall as saying the incoming administration is seen as pro-business because of a shift to "less government spending, lower taxes and less regulation." An LCD article concurs and further notes that easing regulation on public lenders will intensify competition between the BSL and private sectors. Moody's Ratings in turn warns that a heightened demand for M&A deals could highlight weaknesses in credit agreements, possibly leading to new lines of attack in liability management exercises.
- Also in the aftermath of the election, Jerome Powell indicated that the "economy is doing very well" and the Fed is therefore not "in a hurry to lower rates," dimming the likelihood of a third cut before the end of the year. Prospects of higher-for-longer baseline rates once again led to a spike in loan market issuances, as borrowers and bond issuers rushed to market "to lock in historically tight spreads" before year end. This dynamic also triggered strong inflows into leveraged loan ETFs, resulting in a high-water mark for the year.
- The payment default rate for leveraged loans has eased to 0.73% as of October, down from 1.26% in September and a recent high of 1.75% in July 2023, according to LCD. There were 14 global corporate defaults, from 11 in September; the year-to-date total rose to 123, compared with 127 in 2023. Selective defaults, however, rose more sharply because of increasing use of out-of-court liability management exercises, with a trailing 12-month figure of 37 selective defaults to October, compared with 17 this time last year and seven the year before. In fact, borrowers are increasingly skirting traditional bankruptcies in favor of out-of-court restructurings, typically in the form of distressed debt exchanges, leading to the spike in selective defaults, according to a report by S&P Global Ratings. Distressed exchanges contributed to an increase in the US leveraged loan default rate this year, hitting 4.72% in October compared with 2.99% last year, according to Fitch Ratings. S&P correlates the growth of distressed exchanges to PE ownership over the past few years, as private equity owners are keener on maintaining control of their assets and therefore not as eager to take them into bankruptcy court. The most typical outcome of these distressed exchanges has been to extend maturities, with conversion from cash pay to PIK also being a popular option, as we discussed in the most recent Debt Download. Looking ahead, S&P expects the US speculative-grade corporate level default rate to sink to 3.25% by September 2025, from 4.4% this past September, on account of economic growth, Fed rate cuts and lower inflation.
Goodwin Insights – Year in Review (US)
Intense competition among lenders characterized the debt markets in 2024. The US broadly syndicated loan (BSL) markets showed impressive performance from the very start of the year, with a significant increase in loan issuance and a surge in refinancing activities, each of which generated record-breaking volumes: Loan issuance reached $1.1 trillion by the end of October and refinancing activity hit $224 billion.
The Impact of Economic Volatility
Economic volatility played a significant role in shaping
the debt markets this year. In August, news of slowing economic
growth and weak jobs numbers caused a sharp drop in secondary loan
trading prices, leading to a temporary halt in new issuances.
However, the markets quickly regained their footing, with issuances
resuming and the impact of the sell-off being downplayed by market
participants. It was at this point that the Fed also started to cut
baseline interest rates, opening September with a
middle-of-the-road 50 basis point cut to a target range of 4.75% to
5.00%, the first rate cut since March 2020. The Fed followed this
up with a more modest quarter-point cut in November, following the
US elections.
Unprecedented Levels of Refinancing Activity
The trend in 2024 that garnered the most headlines was the
unprecedented levels of refinancing activity. Lower spreads pushed
more borrowers to refinance their relatively expensive private debt
into cheaper BSLs. This trend was most pronounced among lower-rated
borrowers (B-minus or below), allowing them to save significant
interest expenses and extend maturities, despite historically high
yields-to-maturity.
Innovations and Strategies in Private Lending
Private lenders innovated and adapted to the changing
landscape. The adoption of open-ended private credit funds gained
traction, offering an evergreen option for investors and attracting
new classes of investors, including wealthy individuals.
Additionally, private lenders expanded into new areas of lending,
such as infrastructure projects and investment-grade loans, and
even muscled into riskier consumer debt, such as credit card and
"buy now pay later" assets.
Stay tuned for future editions of Debt Download for a review of the European and UK markets and to see where we think the markets are heading in 2025.
In Case You Missed It – Check out these other recent Goodwin publications: Medtech M&A and Venture Investments Show Renewed Strength; Trends in Equity Repurchasing in PE: Rollover vs. Incentive Equity; What Is the Typical Life Cycle of a Closed-End Fund?; NYDFS Publishes Guidance on AI-Related Cybersecurity Risks; Horizon Scan for Private Investment Funds (Autumn 2024); 2025 SEC Exam Priorities for Investment Advisers and Registered Investment Companies
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