New money volumes steady in US levloans, as deal recycling slows
The pace of loan refinancing and repricing eased in the first quarter of 2018, according to a quarterly update from Fitch Ratings. Some investors expect this trend to continue as companies look to dodge rising rates by refinancing loans in the fixed rate bond market.
The volume of loans being refinanced or repriced fell by 46.8% in the first quarter to $123.6bn, according to the Fitch note. New money leveraged loan volume was $61.9bn, 2.8% below the amount sold during the same period last year. This meant new money deals accounted for 33.4% of total loan volume, up from 21.7% in the first quarter last year. Over the course of the full year, new money deals accounted for 33% of issuance.
Issuers have been quick to refinance their debt in the loan market, as there has been heavy demand for floating rate debt, allowing borrowers to cut the interest on the same loan repeatedly. While that remains the case, some investors have suggested that rates may be getting to the point where borrowers would prefer to refinance floating rate debt with the surety of
Last week the 10 year US Treasury yield rose above 3% for just the second time in this credit cycle.
“We’re used to seeing people refinancing in the loan market, but now with rates going up these loans are becoming more expensive for issuers. I think we’ll see a reversion in the bond market to companies exiting the loan market and refinancing with a fixed rate coupon,” said one high yield portfolio manager.
One benefit for borrowers, he suggested, is that they could free up collateral that is tied down in secured floating rate debt, and issue unsecured bonds.
Although this would usually mean the debt is more expensive, for second lien loans at least it could be cheaper to refinance with a high yield bond, according to one sell-side source, given the shortage of primary issuance in the high yield market. He suggested second lien loans carrying interest of around 9%-10% could be refinanced “south of 8%” in the bond market.
New high yield issuance in the year to date, excluding refinancing, is at $31.6bn according to JP Morgan analysts, down 19% compared with the same period last year.
Demand for floating rate debt has increased compared with last year, however, which has driven down the cost of issuing loans. The volumes of CLOs (which Fitch reported now account for a 51% share of the loan investor base, the highest level since August 2012) are at $43bn in the year to date up from $27.6bn in the year to date last year. Retail fund flows have also posted inflows of $6.3bn in the year to date.