PitchBook | LCD Releases Institutional-Grade Research on the Syndicated Loan and Private Credit Markets in Q2 2023

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Jul 13, 2023, 09:00 ET

SEATTLE, July 13, 2023 /PRNewswire/ -- PitchBook, the premier data provider for the private and public equity markets, has released its quarterly roundup of critical insights on the state of the US loan markets. PitchBook | LCD's "US Credit Markets Quarterly Wrap" provides an overview of leveraged loans, private credit, CLOs, market themes, a quarterly client survey, and updated analysis on the loan market's transition from LIBOR; and the "June US Leveraged Loan Monthly Index Wrap" reviews loan returns, net supply, loan volume, and default rates.

"In the first half of 2023, the US leveraged loan market has been plagued by tightening credit conditions, a languishing M&A pipeline, rising debt costs amid rate hikes that came at the fastest pace in decades, and a more selective lender base," commented Marina Lukatsky, Global Head of Credit Research at PitchBook | LCD. Refinancing volume accounted for much of the new-issue loan supply in the second quarter, at $31.6 billion, or 63% of the total. Through June 30, we also tracked $14.4 billion of high-yield bonds issued to refinance existing institutional loans, versus $3.2 billion issued for that purpose for all 12 months last year."

Leveraged Loans

US leveraged loan issuance continued at a snail's pace in the second quarter, with debt refinancing again the focus, as the M&A pipeline languishes. Institutional loan volume – the kind of debt CLOs buy - in the second quarter dipped to $50.5 billion through June 30, from $52.4 billion in Q1, though it topped the $41.3 billion average for 2Q22-1Q23.

Amid the dearth of new supply, arrangers and issuers utilized pockets of supportive market conditions to address near-term maturities — the 2024 maturity wall has fallen by more than half in the year to date, while 2025 maturities have declined by 26%. However, there's still wood to chop within the riskiest corners of the market.

Private Credit

PitchBook | LCD estimates that the volume of M&A financed via directly originated loans totaled $42.6 billion, a number that exceeded both syndicated loans and high-yield bonds.

Private-equity-backed borrowers raised $66.4 billion in the syndicated loan market in the year to June 30, but more than half of this amount supported refinancings, as opposed to lucrative LBO transactions.

The leveraged finance pendulum is expected to move slightly further in the direction of the syndicated loan market in the second half of 2023, and away from private credit.

CLOs

US CLO issuance slipped after a promising start to the year in the first quarter. US CLO volume in the second quarter plunged to $21.6 billion, from $33.5 billion in Q1, a 36% drop. CLOs are by far the biggest investor in syndicated loans.

Total year-to-date issuance of $55.2 billion is the second lowest first-half volume in the last six years, ahead of only the market decline in 2020 during the Covid-related global economic slowdown. The 2023 pace trails the comparable 2022 period ($73.2 billion) by 25%.

US middle-market/private credit CLO issuers, with volume of $11.4 billion so far in 2023, have nearly matched their 2022 full-year total and increased their market share of all CLO issuance to 21%. That share is nearly double the traditional proportion of issuance for private credit/middle-market CLOs.

Middle market CLO AAA spreads, which traditionally carry a 40-50 bps spread premium to larger syndicated loans, ranged from 250-270 bps in the second quarter.

Q2 LCD Leveraged Finance Survey

LCD's quarterly client survey asks buyside, sell side, and advisory accounts about what to expect going forward in the leveraged credit markets. Headline results of the survey include:

The loan default rate is expected to be 2.50-2.99% a year from now, up from 1.71% currently;
"Immaculate disinflation" is highly unlikely;
Credit conditions are expected to tighten (moderately) further;
The Tech and Healthcare sectors are expected to outperform in the second half of 2023.

An interactive graphic of the survey results is available here.

Morningstar Indexes

Rising rates have put the floating-rate loan asset class on pace for the strongest year since the Global Financial Crisis. Through June 30, the Morningstar LSTA US Leveraged Loan Index gained 6.48%, the highest reading for any comparable period since 2009. Thanks to rising rates, the interest return component of total return, which tracks the contractual coupon on the loan and the base rate, accounted for 70% of 1H23 total return, at 4.58%. This is a post-crisis high.

Although volatility declined from eye-popping levels in 2022 and 2020, it remains elevated relative to historical levels. Default rates are rising at the fastest clip since the 2020 pandemic, although they remain, for now, below the historical average.

For more information about PitchBook | LCD research, click here.

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