A strong finish to 2023 helped to boost global leveraged loan issuance at the end of an otherwise rocky year for all key markets.
The last 12 months were incredibly challenging for banks, investors and borrowers, as elevated inflation levels and interest rates caused borrowing costs to surge and risk appetite to diminish.
In the US, leveraged loan issuance in 2023 was down 17.3% year-on-year at US$876.9 billion, while in Western and Southern Europe, issuance declined by 10.2% from US$193.9 billion in 2022 to US$174.1 billion in 2023. In the smaller APAC market, leveraged loan issuance dropped 11% in 2023, sliding from US$37.4 billion in 2022 to US$33.3 billion, while the region’s non-leveraged loan market declined by 19.3% during the same period, from US$305.5 billion to US$246.4 billion.
Outlook improves as market rallies
A rally in issuance in the final months of 2023 helped to cushion the impact of market disruption and steer the US and European loan markets to a soft landing.
According to Debtwire, US loan markets enjoyed two very strong months of institutional loan activity in 2023: September and December, with issuance reaching US$60 billion and US$52 billion, respectively, the two highest monthly totals since 2021. Meanwhile, in Europe, October and November were the two biggest months for institutional issuance in 2023, with volumes of €11.9 billion and €10.9 billion, respectively.
That uptick in issuance in Western markets toward the end of the year has put leveraged loans on a much firmer footing in 2024. There is cautious optimism that the momentum from the last few months of 2023 will be carried forward.
The outlook for interest rates and inflation has been improving, which has been the major contributor to the increasing confidence in the US and Europe. The Federal Reserve has held benchmark interest rates steady since July and, as inflationary pressures subside, economists believe there is an increasing likelihood of rate cuts later this year. The European Central Bank has also kept rates steady following its January 2024 meeting, and markets are now pricing debt in anticipation of rate cuts later in 2024.
In the US, according to Debtwire, the average margins on first-lien institutional loans for Q4 2023 came in at just under 4%—well below the peak of almost 4.9% in Q3 2022. In the US secondary markets, weighted average loan bids had improved to 94.6% by the end of 2023—the highest point since the middle of 2022—and nearly a third (31%) of loans traded above par.
Average loan margins have also remained quite stable in Europe over the past five quarters, with a high of 4.9% in Q1 2023 and a low of 4.5% in Q4 2023—the lowest level since Q2 2022—and a median of 4.6% between Q4 2022 and the end of last year. In comparison, average loan margins fluctuated during the three quarters before that period, rising by almost a full percentage point between Q1 2022 (4.3%) and Q3 2022 (5.2%). In the secondary markets, conditions have also improved, as Q4 2023 average bid prices came in at 95.3% of par compared to 90.6% at the start of 2023.
Refinancing rebounds, but M&A still lags
As prices stabilized through 2023, refinancing activity surged as borrowers with approaching maturities came to market to refinance existing loans and extend terms against a more settled backdrop.
In the US, refinancing activity came in at US$632.9 billion for 2023, up by 1.5% compared to 2022’s figures. This increase has helped to address impending maturity walls, with Debtwire noting that 2024 and 2025 maturity walls have now been “systematically broken down.”
In Western and Southern Europe, refinancing also dominated issuance activity, rising by 43.1% from US$77.1 billion in 2022 to US$110.3 billion in 2023, accounting for 76% of all institutional loan issuance last year.
There has also been a surge in repricing in the European leveraged loan market at the beginning of 2024—with repricing returning at a pace not seen since the start of 2020.
Several borrowers are currently seeking to knock anywhere from 25bps to as much as 100 bps off existing margins, with most marketing their deals at par.
While refinancing has proven resilient, Western markets are still awaiting a similar rally in buyout and M&A financing. A decrease in deal activity—global M&A deal value dropped by 16% year-on-year in 2023—has limited the buyout and corporate M&A financing opportunities in both the US and Europe. In 2023, combined loan issuance for buyouts and corporate M&A fell by 61.5% year-on-year in the US and 46.8% year-on-year in Western and Southern Europe.
However, M&A markets did show some signs of life in H2 2023, as illustrated by Chicago-based private equity firm GTCR’s US$18.5 billion carve-out of a majority stake in payments company Worldpay, which received strong support from lenders. Meanwhile, in Europe, a consortium, including Permira and Blackstone, announced a take-private deal for Norwegian online classifieds group Adevinta for €13.1 billion (US$14.2 billion), Europe’s second largest buyout of the year. But the recovery in M&A activity still has a long way to go before buyout and M&A loan issuance volumes normalize.
China headwinds take toll on APAC
The trends that shaped loan issuance activity in Western markets in 2023 differed from the dynamics in APAC, where slower-than-expected growth in the dominant Chinese market has been the main reason for the decline in year-on-year loan issuance.
Since COVID restrictions were lifted in 2022, the Chinese economy has not bounced back as strongly as anticipated. Moreover, a liquidity squeeze in the real estate market—which accounts for around a quarter of China’s GDP—has muted borrower and lender demand.
Other parts of APAC have helped to pick up some of the slack, with investors looking to emerging markets such as Vietnam to maintain exposure to the region. For its part, the South Asian market defied the year-on-year downturn in leveraged loan issuance recorded across APAC, with the volume of leveraged loans issued in South Asia more than doubling in 2023 compared to 2022, and the aggregate value of those loans increasing by 138% from US$3.2 billion to almost US$7.6 billion during the same period. And although large Chinese issuers, such as the Alibaba Group, have continued to tap syndicated loan markets when required, issuers in other countries, such as India’s HPCL Rajasthan Refinery, delivered some of APAC’s largest syndicated loans deals in 2023.
Investors, lenders and borrowers are hoping that a recovery in the Chinese market after a challenging 2023 will boost the region beyond the steady levels of activity in these neighboring jurisdictions.
