Macro Headwinds Slow Global Leveraged Loan Market in H1 | White & Case srl

Rising inflation and rising interest rates slowed leveraged loan activity in Europe and the US, while COVID-19 restrictions in China dampened demand in Asia -Peaceful

Leveraged loan markets around the world faced a difficult first half of 2022, as macroeconomic headwinds weighed on issuance in the United States, Western and Southern Europe and Asia-Pacific.

Overall issue in value Q2 2020 – Q2 2022

Device type: Leveraged loans Use of profits: All
Location: Western and Southern Europe and the United States Sectors: All sectors

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In the United States, leveraged loan issuance for the first six months of the year reached US$612.5 billiondown on the US$755.5 billion posted for the same period in 2021, although there was an upturn in activity in the second quarter of the year as markets recovered.

In Western and Southern Europe, leveraged loan issuance also fell year-over-year, from $195.1 billion in the first half of 2021 to $67.8 billion in the first half of 2022.

Markets for leveraged and unleveraged loans in Asia-Pacific (excluding Japan) also slowed in the first half of the year, but to a lesser extent as issuance reached US$176.4 billion for H1 2022, slightly lower than US$178.8 billion recorded in H1 2021.

Inflation and interest rates challenge Western markets

In Europe and the United States, high inflation and rising interest rates, along with weak equity markets, caused investors to catch their breath and adopt a more cautious approach.

In an attempt to contain inflation, the Bank of England raised its benchmark interest rate to 1.25% in June, the highest level since 2009. That same month, the US Federal Reserve raised its rate benchmark interest rate of 75 basis points, the highest rate. increase since 1994, followed by another rise of 75 basis points in July, bringing its benchmark rate to a range of 2.25% to 2.5%.

The European Central Bank also raised its key interest rate by 0.5 percentage points in July to 0.0%, the first increase in 11 years, with further rate hikes expected later in the year.

As benchmark rates have risen, loan pricing has risen slightly. According By debts, institutional loan prices in the second quarter of 2022 reached the third highest level in the last ten years, averaging 4.99% and only slightly below the 5.31% reached in the second quarter of 2020 and 5, 23% recorded in the first quarter of 2016.

In the United States, average spreads on senior institutional loans fell from 3.73% at the end of 2021 to 4.31% at the end of June 2022.

Buyout issuance in Europe stalls as refinancing drops

While primary loan costs rose, prices for existing European loans in the secondary market fell in the first half of the year, with the weighted average supply on all term loans down nearly 10% from to January to reach 87.66% of par at the end. of June, according to Debt thread Par.

With borrowers reluctant to refinance existing debt at higher prices unless absolutely necessary, and lenders able to recoup existing loans at significant discounts to face value, European refinancing – a major driver of activity in 2021 – has been particularly hard hit.

Refinancing, repricing and amendment issuance in Western and Southern Europe reached US$8.3 billion in the second quarter of 2022, the slowest quarter since the fourth quarter of 2015. Semi-annual issuance fell from $103 billion in the first half of 2021 to US$31.7 billion in H1 2022.

Issues for European buyouts, although also down year-on-year, proved more resilient. Despite a deteriorating macro backdrop, cash-rich private equity firms continued to seek deals and secure funding.

Financings for European takeovers that have taken place so far this year include Egeria’s acquisition of German piping systems group Isoplus, KKR’s purchase of the Refresco beverage business and IK Partners’ secondary takeover of FCG risk management consultancy in Bridgepoint.

As buyback operations continued, albeit at a slower pace, European buyback issues were down 34% year-on-year to US$22.1 billion H1 2022, compared to a 65% decline in overall loan issuance in the region.

APAC resists lockdown slowdown

Unlike Western markets, inflationary pressures in Asia-Pacific have been less acute, with inflation in China, the region’s largest market, hovering around 2%, compared to inflation rates above 8% in United States and Europe.

China, however, faced a new round of pandemic restrictions following the biggest wave of COVID-19 in 2022. This prompted the World Bank to cut its economic growth forecast for China by almost 1%. while Fitch Ratings notes that the APAC region saw the highest number of sector outlook revisions globally due to the lockdowns as well as the impact of events in Ukraine.

In the face of these macroeconomic and geopolitical headwinds, both leveraged and unleveraged loan issuance declined in Asia Pacific, but at a much slower pace than in the United States and Europe. Issuance in APAC (excluding Japan) for H1 2022 is down less than 1.5% year-on-year, as the European and US loan markets experienced double digit drop.

The steady level of lending activity in APAC was supported by issuers that turned to bank lending away from the region’s bond markets, which were more sensitive to events in Ukraine, rising interest rates interest in the United States and the dislocation of the Chinese real estate sector. Asian banks, on the other hand, are cash-rich and have been keen to lend in markets where interest rates on loans have tended to rise.

Another bright spot was APAC’s Sustainability Linked Lending (SLL) market, which links loan margins to sustainability metrics, remaining active despite global volatility.

Bloomberg figures show that US$22 billion of SLLs were concluded in Asia in the first five months of 2022, more than double the total posted in the same period of 2021. In May, Syngenta secured the largest SLL never registered in Asia with $4.5 billion deal. .

There is still a debate around transparency and standards for Asian SLLs – a debate that is also very current in Europe and the United States – but with a still nascent market compared to Europe and the United States , and with the governments of Hong Kong and Singapore offering incentives to reduce external oversight costs for SLLs, the space remains on a positive growth trajectory.

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Priscilla C. Carnegie