A brisk first half for US leveraged finance markets

US leveraged loan markets have sprung back to life following three consecutive slow quarters in 2020 due to Covid-19. Leveraged loan issuance up to the end of June 2021 reached $763.5bn, a 60% increase compared with $478.1bn in the first six months of 2020, according to data in 'US leveraged finance: The road ahead', a report from international law firm White & Case.

High-yield bond market issuance, which soared in 2020 as firms sought liquidity in the early months of the pandemic, has also remained high in 2021. It rose 22% year-on-year to $267.1bn in the first six months of 2021, compared with $219.6bn in the first half of 2020. The 2020 first half total was itself an 80% increase compared with 2019’s mid-year total.

The pace of market activity so far in 2021 has largely been driven by refinancing and repricing, according to the report, with borrowers taking advantage of favourable terms and pricing to refinance existing loans and bonds to deal with lower margins and extended maturities. Refinancings accounted for 62% of overall loan issuance in the first half of 2021. In the high-yield bond markets, this type of issuance represented 70% of the market, reaching $186.8bn, a 48% increase compared with 2020.

Institutional loans, such as loans sold to non-bank investors, saw a particularly sharp rise, with issuance reaching $520.4bn, a substantial increase compared with $288.7bn in the same period of 2020. Although by far the largest share of institutional activity was accounted for by refinancings, the period saw consistent increases in issuance for mergers and acquisitions (M&As) and leveraged buyouts (LBOs), reaching $71.2bn and $50.2bn, respectively, by the end of June. M&A and LBO deals also significantly contributed to activity in the high-yield bond markets, with issuance reaching $30bn and $8.4bn, respectively, in the first half of 2021.

The second quarter of 2021 also saw an increase in new money deals coming to market. For leveraged loans, this type of issuance totalled $147.4bn, a 42% increase compared with the previous quarter. For high-yield bonds, new money issuance reached $50.7bn in the second quarter of 2021, almost double the $26bn total seen in the previous quarter. Although markets remained robust overall in the second quarter, there was a slowdown due to a dip in refinancing activity.

Credit quality in these markets also improved during the first half of the year. In June, Fitch forecast that US leveraged loans and high-yield bonds were heading for 10-year lows. The agency also reduced its forecasts for leveraged loan and high-yield default rates to 1.5% and 1%, respectively, from 2.5% and 2%. Credit rating actions have also been improving, out of the 153 actions taken for 137 companies in North America, 60% were revised to “stable” and 12% changed to “positive”. Just 6% were changed to “negative”.