PitchBook | LCD Releases Institutional-Grade Research on the Syndicated Loan and Private Credit Markets in Q3 2023

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Oct 12, 2023, 09:00 ET

SEATTLE, Oct. 12, 2023 /PRNewswire/ -- PitchBook, the premier data provider for the private and public equity markets, today released its quarterly roundup of critical insights on the state of the global loan markets. PitchBook | LCD's "US Credit Markets Quarterly Wrap" provides an overview of leveraged loans, private credit and CLO market themes. New issuance in Q3 hit the highest mark since the rate-hike onset in 1Q22, accompanied by a strong rally in the loan trading market. The broadly syndicated loan (BSL) market even regained some ground, versus private credit, further supporting the view that the private credit and BSL markets will co-exist in the long term. Middle market private credit CLO activity grew, maintaining an approximate 22% market share against BSL CLO activity, adding up to $18.4 billion so far in 2023. In high yield, issuance picked up but blistering costs remain. To review the full report, click here.

Bonds
Amid high funding costs and heightened risk aversion, the high yield bond market has seen a seismic shift in issuance trends. Atypically high amounts of issuance this year include collateral backing, and shorter maturities.

In the third quarter, nearly 70% of the $41 billion of high yield bond issues included collateral backing. Year to date, 62% of market issuance has come via secured bonds, the highest share on LCD's record of tracking since 2005. Unsecured high yield bonds – the mainstay of this market – remains at historic lows. The $13.2 billion of unsecured bonds priced in Q3 brings the year-to-date total to $50.3 billion, the lowest year-over-year output for unsecured high yield placements since 2005.

High costs are also deterring issuers from stretching their funding horizons, which may contribute refinancing risks in the years to come. The number of new deals with maturities longer than eight years, meantime, is at an all-time low.

CLOs
US CLO issuance picked up during the third quarter as spreads tightened and managers were able to affordably ramp up long-standing CLO warehouses.

Third-quarter CLO issuance of $27.96 billion through Sept. 30 is up from $22.42 billion in the second quarter, though it falls short of the $33.23 billion from the third quarter of 2022. The 2023 issuance total of $83.92 billion trails last year's third quarter-end volume of $106.42 billion by 21%.

Distressed
In tandem with easing stress barometers more generally, and with 15 facilities rolling off the trailing twelve-month calculation against five new defaults, the loan default rate by amount fell to 1.27% in 3Q23, down from 1.71% at the end of June.

The share of performing loans priced below 80 — a line in the sand for the loan distress ratio and demonstrated forerunner for the future default rate — eased to 4.36% in 3Q23, from 6% in 2Q23.

This translates to $60.7 billion of loans priced at distressed trading levels at the end of September.

Middle Market
The push and pull between Private Credit vs Broadly Syndicated markets saw borrower companies increasingly turn to the private credit market in 3Q23 to finance transactions that in the past would have been done in the syndicated loan market, including Finastra's landmark $4.8 billion unitranche credit facility and Hyland Software's $3.4 billion unitranche financing, the refinancing transactions resulted in large loan tranches leaving the Morningstar LSTA US Leveraged Loan Index. For buyout deals, LCD tracked 25 LBOs financed in the private credit markets in 3Q23, down from 39 in 2Q23 and 69 in 1Q23.

Leveraged Loans
The leveraged loan primary market continued to recover in the third quarter as new-issue institutional volume totaled $76.3 billion, the highest mark since the current cycle of Fed rate hikes began in the first quarter of 2022.

Breaking total volume down by purpose, refinancings led the way for the fourth straight quarter, at $38.8 billion. That's the third consecutive quarter featuring $30 billion or more of refinancings, which hasn't happened since the first nine months of 2021. LBO/M&A issuance reached a five-quarter high of $27.8 billion. Specifically, new loans issued to support LBOs tallied $15.3 billion, representing 55% of the M&A-related volume.

Worldpay's highly anticipated jumbo LBO accounted for a large chunk of that, with a $5.2 billion term loan that was upsized from $3.4 billion at launch, and a €500 million term loan. For its size, the deal provided a glimmer of optimism the appetite from banks to underwrite new deals is returning.

Morningstar Indexes
The Morningstar LSTA US Leveraged Loan Index posted its strongest quarter since 4Q20, with the floating-rate asset class returning 3.46% to bring the YTD return to 10.16%. Rising base rates have contributed to these outsized gains. The interest component of total return stands at 7.18% this year. The weighted average bid of the index hit 95.91 on Sept. 18, roughly 3.5 points above the low point for the year.

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

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