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US leveraged finance: The road ahead
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Downgrades, defaults, distressed debt and refinancing

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HEADLINES

  • 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

 

Abundant liquidity, a red-hot refinancing market and improving credit ratings combined through the first half of 2021 to limit defaults and ease any near-term pressure on the balance sheets of US borrowers.

Borrowers have found lenders open and amenable to refinancing existing loans and bonds. Refinancing and repricing in US leveraged loan markets totaled US$471.7 billion over the first six months of 2021, a 79 percent year-on-year rise that represents almost two-thirds of total issuance for the year. US high yield bond refinancing accounted for 70 percent of total high yield issuance, climbing 48 percent year-on-year to US$186.8 billion by the end of June 2021.

79%
Refinancing and repricing in US leveraged loan markets totaled US$471.7 billion over the first six months of 2021, up 79% year-on-year

The high levels of refinancing activity have strengthened the underlying credit fundamentals of borrowers, who have been able to extend maturities and either lock in lower pricing or increase the size of borrowing facilities.

Atlanta-based payments company Fleetcor Technologies, for example, refinanced its securitization term loan B facilities to lock in close to US$2 billion of liquidity at lower rates and with longer maturities.

Borrowers have also had the option to amend-and-extend the terms on their loans to push out any imminent maturity cliff edges. According to ratings agency Standard & Poor's, US$41 billion in amend-and-extend deals were secured for the year to the end of April 2021—up year-on-year and already more than half of the annual amend-and-extend activity posted in all of 2018 and 2020.

 

Default risk diminishes

The capacity in the market to either amend-and-extend terms or refinance deals in such high volumes has all but removed the risk of defaults for borrowers that were running low on liquidity due to COVID-19 lockdowns and approaching maturity walls.

According to Standard & Poor's, the volume of loans falling due between 2021 and 2023 was reduced by US$198.3 billion between the end of 2019 and the end of April 2021. The volume of loans falling due in 2024 and 2025 dropped by US$135.1 billion over the same period. Longer-dated maturities due in 2026 or later, meanwhile, have swelled to US$348.4 billion as maturities have been pushed out and borrowers kick the can down the road.

With the threat of a maturity cliff edge effectively averted, default rates have decreased and credit ratings have improved. In June, ratings agency Fitch lowered its leveraged loan and high yield bond default rates forecasts for 2021 to 1.5 percent and 1 percent respectively. And as corporate balance sheets stabilized and company earnings improved, the credit ratings environment is looking far healthier—according to Debtwire Par's Ratings Tracker, in the last two weeks of June, out of the 153 actions taken for 137 companies, just six percent were changed to "negative"ratings.

The benign default rates and improving credit ratings observed so far in 2021 stand in stark contrast to the distress and volatility seen a year ago. In the first half of 2020, ratings downgrades became a feature of the market: 101 companies downgraded in June following 121 downgrades in May, 230 downgrades in April and 169 downgrades in the second half of March, according to the Debtwire Par Ratings Tracker.

The wave of downgrades was accompanied by a spike in default rates, which climbed to 4.5 percent among institutional loans in 2020, up from 1.7 percent in 2019, representing the highest levels observed since 2009 in the aftermath of the global financial crisis. High yield bond default rates, meanwhile, spiked from approximately 3 percent in January 2020 to close to 6 percent by the middle of the year.

 

Restructurings on hold

The surge in default rates and ratings downgrades never led to the anticipated levels of deep financial distress and restructurings, as borrowers refinanced or amended-and-extended their loans and bonds. Cases where companies ran out of cash and faced chapter 11 bankruptcy were kept to a minimum as a result. The rising number of credit ratings upgrades is expected to keep this supportive backdrop in place through the rest of 2021, especially as it will encourage sustained demand from collateralized loan obligation (CLO) managers, whose targets are linked to ratings.

With ratings improving, CLOs will have a significant influence on the levels of liquidity available in the market—new CLO issuance over the first six months of 2021 was up 140 percent year-on-year at US$80.56 billion, supported by this trend of improved ratings.

The wave of US debt restructurings anticipated during the depths of the COVID-19 debt crisis appear to have been put on hold—at least for now.

 

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US leveraged finance: The road ahead

 

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