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US leveraged finance: The road ahead

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What will drive issuance in a post-COVID-19 world?


Halfway through 2021, we take stock of leveraged finance in the United States and consider the road ahead for both borrowers and lenders. After more than a year of COVID-19, are things returning to normal? Or are we just starting a whole new journey?

In many ways, COVID-19 had far less of an impact on leveraged finance markets than expected. Activity dropped in the second quarter of 2020, primarily in leveraged loan issuance, but a year later numbers returned to pre-pandemic levels. In fact, leveraged loan and high yield bond values reached record highs by the end of Q1 2021—the highest quarter since Q2 2018 and the second-highest quarter, respectively, on Debtwire Par record going back to 2015.

What drove this relatively high-speed recovery? First, the Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in March 2020, protected many businesses from the full brunt of the pandemic. At the same time, many businesses shored up their finances, taking on debt to ensure liquidity as lockdown measures continued to have an impact through the second half of 2020. Issuances rose and that upward trajectory carried on into 2021.

By the end of Q1 2021, the picture had changed once again. Vaccines were being distributed quickly and efficiently, raising hopes for a post-COVID-19 future. The economy was also improving, as various states began to open up and a year of pent-up consumer demand was released. By May, core retail sales in the US had reached levels typically only seen over the Christmas period, according to the National Retail Federation. An air of optimism crept into the market, with lenders increasingly willing to take more risks on borrowers in their pursuit of yield. Financing earmarked for M&A and buyout activity also began to climb, hinting at growth plans for the months ahead. Perhaps most significantly, the low interest rate environment gave businesses an opportunity to reprice and refinance their maturing debt in droves.

What's next for 2021?

While these are all very positive signs for lenders in the leveraged finance space, there are still a few red flags on the horizon. First is inflation—in July, the Bureau of Labor Statistics reported that the US consumer price index had climbed 5.4 percent in the 12 months to June, a level not seen in 13 years. These growing inflationary pressures are part of the rush to reprice and refinance existing debt, as businesses try to avoid any unpleasant surprises if interest rates begin to climb as well.

Second, companies in robust sectors that enjoyed a degree of preferential treatment from lenders during the pandemic may find that sentiment shifting in the months ahead as other sectors begin to recover. The "flight to quality" witnessed in the early days of the pandemic will likely return to a more evenly balanced state of affairs. Documentation may also go through some changes in the coming months, as adjustments brought in during COVID-19 are phased out.

Finally, as the dust settles in debt markets, issues that were gaining ground before the pandemic will return in force, especially environmental, social and governance factors, which continue to take on increasing importance among borrowers and lenders alike.

All of which means the road ahead is not quite as clear as many would like, but there will be fewer obstacles blocking the path.

The US leveraged finance story so far

  • Leveraged loan issuance reached US$763.5 billion in the first half of 2021, up 60 percent from US$478.1 billion in the same period in 2020
  • High yield bond market issuance also rose 22 percent year-on-year, from US$219.6 billion to US$267.1 billion
  • Refinancings and repricing deals accounted for 62 percent of overall loan issuance in H1 2021
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From closing loopholes to rising inflation: Five trends that will drive leveraged finance

  • Leveraged loan and high yield bond markets shrugged off COVID-19 uncertainty to post year-on-year increases in issuance in 2021
  • Features of documents through the COVID-19 period—such as liquidity covenants and EBITDAC metrics—are fading from the market
  • Lenders are increasingly sensitive to the risk of subordination in either right of payment or lien priority
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Fund finance: New ways to harness NAV finance

  • Anecdotal evidence points to a surge in uptake of net asset value finance over the past 12 to 18 months
  • NAV finance is useful for the prevailing longer PE holding periods, which climbed from 3.8 years in 2010 to 5.4 years in 2020
  • Deloitte estimates that the average loan-to-value ratios for NAV facilities sit in the 25% to 30% range
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Downgrades, defaults, distressed debt and refinancing

  • Refinancing and repricing in US leveraged loan markets surged to US$471.7 billion over the first six months of 2021
  • US high yield bond refinancing accounted for 70 percent of total high yield issuance
  • Amend-and-extend deals give borrowers further breathing room
  • The extension of maturities has reduced near-term risk of default and limited the number of borrowers running out of cash and facing bankruptcy
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A more sustainable approach to debt financing

  • Global green bond issuance reached US$305.3 billion in 2020, according to Bloomberg data
  • Ratings agency Standard & Poor's forecasts that global issuance of sustainability-linked debt instruments will exceed US$200 billion in 2021
  • President Biden has pledged to cut US carbon emissions to at least 50 percent below 2005 levels by 2030, advancing the ESG agenda
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Ongoing SPAC surge reshapes capital structures

  • 248 SPACs listed in 2020, raising US$82.6 billion—a more than six-fold rise on 2019 issuance
  • 362 SPAC vehicles raised US$110.2 billion in H1 2021
  • 176 M&A deals worth more than US$386.1 billion have been completed via SPACs in H1 2021
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How distressed companies are avoiding full-blown bankruptcies

  • Announced US corporate bankruptcies climbed to 630 cases in 2020, according to Standard & Poor's—up from 2019 levels, but still lower than expected
  • Bankruptcies ticked higher early in 2021—from 14 cases in January to 23 cases in March, before dropping to 11 in June—but are still well below 2020 levels according to Debtwire Par
  • Covenant relief and uptiering, as well as drop down deals and other liability management structures have offered companies a variety of levers to pull to avoid entering bankruptcy situations
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Energy transition: Financing the race to net zero

  • Green bond issuance climbed 13% in 2020, to US$305.3 billion
  • Global energy investment will have to increase more than three fold to US$5 trillion by 2030 if net-zero carbon emissions are to be achieved by 2050
  • At the start of 2021, renewables accounted for more than 20 percent of total energy generation capacity in the US, surpassing the use of coal
Wind turbine with flower field

Direct lending in the US post-COVID-19

  • North American private debt fundraising increased by 15.8 percent in 2020 despite falling fundraising in other jurisdictions
  • The private debt default rate never rose above 2 percent in 2020 and was lower than high yield bond and leveraged loan default rates
  • Current private debt yields of 7 percent are outpacing high yield bonds and leveraged loans
100 US dollar banknotes scattered


Refinancing, repricing, M&A and buyout activity all surged in the early months of 2021, but then lenders shifted gears in pursuit of yield and borrowers realized they could tap the market for more than just liquidity. Where will this fork in the road lead for the rest of 2021?

Aerial of California Grapevine and Interstate 5 Freeway Farmland
Aerial of California Grapevine and Interstate 5 Freeway Farmland

US leveraged finance: Conclusion

Refinancing, repricing, M&A and buyout activity all surged in the early months of 2021, but then lenders shifted gears in pursuit of yield and borrowers realized they could tap the market for more than just liquidity. Where will this fork in the road lead for the rest of 2021?

4 min read

On the face of it, there's every reason to be optimistic about 2021. Leveraged loans and high yield bonds posted strong numbers in the first six months of the year, with both up year-on-year. There was an uptick in new money deals as companies pursued growth opportunities. CLO new issuance more than doubled year-on-year. And an anticipated wave of defaults, bankruptcies and full-blown restructurings failed to emerge, as companies were able to find the financing they needed to see them through the worst of the pandemic.

At the same time, it's clear that the market isn't quite back to business as usual. For example, while there was a flurry of leveraged loan issuance in February (US$159.3 billion), March (US$174.8 billion) and April (US$147.2 billion), activity was down by more than a third in May to US$86.5 billion.

This slight pause is likely to be temporary, as companies strive to find their footing in a post-COVID-19 recovery, but it also means that lenders and borrowers alike are keeping a close eye on where markets are heading.

At the halfway point in 2021, leveraged loan issuance was up more than 50% on the year before


Big deals

One clear indicator of the state of the market has been the resurgence in financing earmarked for M&A and buyouts, with both leveraged loans and high yield bonds. For example, in Q2 2020, leveraged loan issuance was applied to just 47 M&A deals (excluding buyouts). By Q2 2021, that figure had more than doubled, reaching 97 deals.

It was a similar story for high yield bonds, with issuance for M&A (excluding buyouts) jumping from US$7.1 billion in Q1 2021 to US$22.9 billion in Q2 2021.

Even more notable are the jumbo LBO deals that have gone through in the first half of the year, including one of the largest on Debtwire Par record. Overall, LBOs have reached historical highs in the US—deal count for the first quarter of the year (709) set a record and deal value in the second quarter (US$236.7 billion) was the highest since the second quarter of 2007, according to Mergermarket data.

It seems private equity (PE) dry powder is finally being spent, as firms chase higher yield deals, spurred on by the threat of rising inflation as well as the availability of inexpensive financing. The fact that several PE houses closed sizable funds in Q2 2021 suggests that we can expect even more LBO activity in the months ahead, which will have a clear impact on issuance.


A more sustainable approach

Another high-profile factor that is likely to influence debt markets is the rise in environmental, social and governance (ESG) criteria being applied to leveraged finance.

The Biden administration has brought climate change back into the spotlight and, while implementing policy changes may be an uphill battle for the president, more and more lenders and borrowers have already been adapting to this new world in their deals.

Green bonds and sustainability-linked bonds and loans have all attracted interest. ESG ratchets—which cause margins on loans to rise or fall depending on whether agreed ESG targets are met—are being added to leveraged loans and revolving credit facilities.

Major PE firms are launching ESG-linked subscription lines, which are used by PE to fund their deals. Standardization and regulation still must be addressed when it comes to ESG and leveraged finance, but all of this points to a more sustainable future in debt markets.


The road ahead 

While it is impossible to say exactly where the current path will take leveraged finance markets for the rest of the year, there is no denying that companies are trying to thrive, not merely survive, and lenders are happy to finance those efforts, for the right price.

There is also a light at the end of the COVID-19 tunnel, as the vaccination roll-out continues and lockdown measures are reduced, which is also encouraging borrowers to look beyond liquidity concerns. 

But there are still unknowns on the horizon. Inflation and the threat of rising interest rates are already driving issuance to a degree, and the potential impact of the end of the COVID-19 federal relief package in the next few months may be cause for concern. At the same time, President Biden’s “Build Back Better” plans, with sweeping investment in everything from infrastructure to job creation, will no doubt influence the direction of travel for debt markets, as they encourage growth and support businesses hoping to move beyond the pandemic.

Time will tell how these various influences play out, but for now, it looks like the bends in the road ahead may be straightening out at last.



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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.

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