LFI Weekly Insights 12/18/20: Hot market conditions help arrangers wrap up large slate of loans; HY logs $14B week in final 2020 push
Underwriters pushed to wrap business this week, and investors obliged, showering commitments on numerous loans and pushing pricing tighter on a parade of transactions, leaving very little left to finish ahead of the holiday break. Bonds were similarly hot, as high-yield racked up the most December issuance for any one week on record, at $14 billion, with heavily oversubscribed transactions, aggressive pricings and post-break gains.
While cleaning up the remaining deals left in the primary commanded nearly all of the market’s attention, demand for loans continued to propel the secondary incrementally higher. As of Thursday’s close, the average bid of Credit Suisse Leveraged Loan Index stood at 95.66, up a further 18 bps from 95.48 from last week's final reading.
The average discounted spread to a three-year-maturity, DM3YR, of Index loans tightened another seven basis points this week to L+490 as of Thursday’s reading.
The average DM3YR now stands 785 bps tight of its post-Great Recession high of L+1275 on March 23 but remains 37 bps wide of its pre-bear market read of L+453 on Feb. 19.
Turning to the active new issue market, heavy reverse flex activity over the past two weeks is evident in this week’s sizable moves in average all-in pricing tracked by LFI. The average all-in spread for all deals, including LIBOR floor benefit, fell to L+488 from L+499 last week, while the average for all single Bs offered a consistent move to L+501 from L+512. Subtracting add-on deals, the move in the single-B average was more pronounced, at L+498 from L+517 at last week’s reading.
Race to the finish
To be sure, it’s been a hectic end to 2020 for the loan market, with arrangers cramming in 51 deals in the narrow three-week window between Thanksgiving and Christmas. Pro forma for the couple of deals left on LFI’s calendar after this week’s rush of allocations, arrangers have priced roughly $33 billion of loans, for about $18 billion of net new money. For an abbreviated month, that’s a healthy total, when you consider the average of the prior three months is just under $17.9 billion. As for this week’s action, just over $18 billion of loans allocated for nearly $8 billion of new money.
The burst of volume hasn’t dented the strong tone in the market — the month-to-date flex ratio is at an incredibly lopsided 37 down to only two up, and the Credit Suisse Leveraged Loan Index hasn’t had one down day in December thus far — setting the stage for a strong start to 2021, barring any shocks to the system. Moreover, this past week was right on trend with 15 deals tightening and only one moving wider.
It’s not uncommon for the loan market to close out the year with a firm tone (2018 being a recent notable exception) given both quarter-end amortization payments and the weeks-long gap between when the market wraps up for the year and the New Year’s deals actually allocate.
This year, however, the bond market is providing an extra tailwind of a flurry of bond-for-loan takeout deals. This week alone LFI has tracked seven issuers that have tapped the bond market to at least in part repay term loans: 99 Cents Only Stores, Affinity Gaming, Berry Global, GFL Environmental, Live Nation, Microchip Technology and Townsquare Media. The repayments associated with these transactions alone total $4.46 billion. These follow on other post-Thanksgiving transactions for Calpine, GrafTech International and LifePoint Health, bringing December’s total of bond-related repayments to approximately $6 billion.
By contrast, LFI tracked two deals this month, Sabre Holdings and Energizer, which were in part to refinance high-yield bonds.
Looking ahead to early next year, the market could see another technical shot in the arm, with the London Stock Exchange’s planned $27 billion purchase of Refinitiv, which was announced in August 2019, is expected to close in the first quarter of 2021. It’s by far and away the largest repayment on LFI’s forward calendar, at approximately $6.4 billion.
All this being said, expectations are for extraordinarily robust market conditions when investors return to their seats in 2021. While by all accounts, the market is expecting a busy start to the year, although the amount of underwritten volume isn’t particularly daunting after arrangers pushed through a heavy slate of M&A/LBO deals over the past few weeks: LFI is tracking $19.5 billion of new loans on the calendar, or $15.6 billion on a net basis. What’s more, stripping out unassociated repayments, the net-net calendar stands at a negative $4.57 billon, potentially further fueling demand.
Amid these supportive conditions, $2.5 billion of the $2.6 billion of loans launched this week were opportunistic in nature, accounting for three of the four new transactions. And following the recent increase in recap transactions, two of these new deals fund dividends, pushing fourth-quarter recap loan volume to $16.3 billion, barely off the third quarter's robust $1.7.7 billion, but busier by number of issuers, at 28 versus 17 quarter over quarter. Moreover, with the year poised to close out at $36.1 billion of dividend loan volume, it’ll be the busiest year since 2017’s towering $51.5 billion tally.
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