Economy pumps the brakes on loan markets | White & Case LLP

Effective debt activity in the US, Europe and APAC is slowing as a weak economic backdrop and the rising cost of debt begin to weigh on issuance.

In Q3 2022 the leveraged credit markets were weighed down by a challenging macroeconomic backdrop and cautious investor sentiment, with year-over-year issuance on all major jurisdictions falling.

Public Release by Value Q1 2020 – Q3 2022

Device type: Leveraged loans Use of income: General
Location: Western and Southern Europe and the USA Sectors: All Sectors

In the US, leveraged loan issuance fell to $207 billion – down 31% year-over-year and the lowest quarter since Q3 2020. Year-to-date issuance reached $842.6 billion, up from $1.1 trillion in the same period. in the year 2021.

It was the same story in most markets this quarter. In Western and Southern Europe, strong loan originations reached $44.9 billion in Q3 – up 39% on Q2, but still the second lowest quarter. Debtwire Par The record dates back to Q2 2016. To date, $135.1 billion has been printed in the region, which is half of the 2021 year-over-year.

In APAC (excluding Japan), leveraged and non-leveraged debt issuance fell to US$56 billion in Q3, the lowest level since Q4 2015. Debtwire Par. The region is projected to print a total of $248.9 billion in 2022, down from $292.6 billion year-on-year.

What is the reason for this slowdown and what do the markets expect for the end of the year?

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The rate hike hit hard

Expectations that inflation had peaked in the United States and Europe over the summer, and that the pace of interest rate hikes would ease, failed to materialize. Inflation remained stubbornly high across Western markets, giving central banks little room for maneuver, and leaving the door open for further rate hikes in the coming months.

In September, the US Federal Reserve raised interest rates by 0.75 percentage points to 3.25%, in November the Fed cut the rate to 4%, and may raise the rate again in December, all to keep inflation at bay. stay on track. its highest level since the 1980s – in control. European and UK central bankers were similarly reluctant, raising rates in early November, as was the Bank of England.

As interest rates have risen, so have financing costs. In the United States, the weighted average rate on institutional loans rose to 4.73% in Q3 2022 from 4.34% in Q2 2022, according to Debtwire Par. At the beginning of the year, the rate was sitting below 4%. European borrowing costs have also increased, from 4.08% in Q1 2022 to 5.29% in Q3.

In addition to paying higher interest rates, lenders also had to offer increasingly generous original issue discounts (OIDs) to keep borrowers on board. OID growth in the US and Europe widened from 6% to 8.9% and in Europe from 5.5% to 8%, according to data from Q2 to Q3. Debtwire Par.

In APAC (excluding Japan), inflationary pressures have eased with inflation in the region’s largest economy, China, hovering around 2.5%. This is well below the levels seen in the US and Europe and the People’s Bank of China has been able to lower key interest rates and keep borrowing costs stable.

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M&A drives the market

Rising borrowing costs have made opportunistic refinancing less attractive to borrowers, while investors have seen additional value in the secondary market, where opportunities have opened up to buy loans at deep discounts.

In the US, refinancing, restructuring and restructuring fell from US$233.1 billion in Q2 2022 to US$116.3 billion in Q3 2022 – representing a 22% decline year-to-date, from US$608.2 billion in the first nine months of 2021 and 475.2 billion dollars in the same period of 2022.

Refinancing, revaluations and restructurings in Western and Southern Europe also contracted, although there was a quarterly decline in Q3 2022. So far in 2022, they have reached $57.2 billion, down from $134.46 billion year-on-year.

With refinancing lacking, the U.S. market has relied on M&A and buyout activity to keep the issuance going — although, once again, issuance slowed when compared to the frenetic activity of the previous year. Outflow for M&A (excluding LBOs) is $133.9 billion in 2022, up from $168.51 billion in the first nine months of 2021.

Among the largest U.S. deals, Clayton Dubilier & Rice financed its $2.8 billion purchase of KAH Hospice with a $1.6 billion term B loan and Corporate Services Inc. raised a $1.25 billion term B loan to fund its Intertrust acquisition finance

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It’s a very different situation for investors in Western and Southern Europe, especially for M&A activity, with issuance for 2022 (excluding LBOs) down more than 80% year-on-year, to US$54.7 billion. to $9.9 billion. Purchasing activity in the region has been fairly stable, falling slightly year-on-year from US$53.71 billion to US$42.4 billion.

Despite this steady stream of buyouts, macro-economic instability made it more difficult for major syndicates in Q3, as seen with the financing of the Citrix acquisition.

The sustainable APAC market is going from strength to strength

While it has also seen a reduction in issuance this quarter, the APAC credit market (excluding Japan), although smaller than its US and European counterparts, has proven stable through 2022.

Foreclosures are a bank-led market where borrowers typically hold their loans to maturity, with more contracts in place and lower yields. This conservative approach has helped protect the market from much of the current economic volatility and has supported a 40% year-over-year increase in credit for sponsor-backed purchases, according to Bloomberg.

Highlights of the deal include a nearly US$1 billion loan to finance Blackstone’s acquisition of Singapore-based real estate engineer Interplex and a financing package for CVC’s $350 million purchase of gaming group Razer.

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