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1Q Borrowing Booms Across Leveraged Loan, HY, & HG Markets; M&A, Pro Rata Underwhelm

This article is more than 6 years old.

Companies across the credit spectrum made hay with low borrowing rates in the first quarter. U.S. Leveraged loan issuance hit a record $202 billion, from $121 billion in 4Q16 and $91 billion in 1Q16.

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Note that these data exclude $170 billion of loan repricings via amendments, in which issuers cut spreads on existing paper without borrowing new money.

U.S. high-yield bond issuance increased to $82 billion, from $47 billion in 4Q16 and $36 billion in 1Q16.

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High-grade issuance, meanwhile, grew to $383 billion, from $204 billion in 4Q16 and $350 billion in 1Q16.

But where’s the M&A?

Two categories of borrowing that failed to shock and awe in the first quarter were M&A and pro rata.

M&A leveraged finance volume rose on an absolute level from both 4Q16 and 1Q16, but it took a much smaller piece of the pie than in 1Q16. M&A loan volume, at $81 billion, accounted for 40% of leveraged loan volume in 1Q17, consistent with 4Q16 but down from 72% of leveraged loan volume in 1Q16. Similarly, M&A issuance decreased to 23% of high-yield bond volume in 1Q17, on par with 4Q16 but down from 43% of the volume in 1Q16. In high-grade, M&A accounted for just 10% of volume in 1Q17, down from 16% in 4Q16 and 19% in 1Q16.

Pro rata loans (corporate debt held by large banks, as opposed to institutional investors) accounted for just 16% of volume in 1Q17, on par with 4Q16 but well below the 55% in 1Q16. Issuers increasingly have been able to secure loans with lighter restrictions than those required by banks.

Risk-on

Concerns about China’s growth and the energy sector helped suppress lending in the first quarter of 2016. A year later, reflecting voter sentiment that brought about the geopolitical shocks of Brexit and Trump, the market has embraced an element of unpredictability. If the global economic outlook has improved, so too has the appetite for risk. The game of musical chairs continues.

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