Looking up as the fog clears
Focus on increase in M&A after a year dominated by repricing and refinancing.
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2014 is expected to be another year of heavy activity in the syndicated leveraged loan market, with volume potentially hitting US$1trn, the second-highest level on record, following the all-time high US$1.14trn issued in 2013.
Issuers will continue to take advantage of low borrowing rates and robust loan demand to cut costs and extend maturities. However, issuance is expected to expand from repricing and refinancing into other uses of proceeds, including mergers and acquisitions.
Leveraged loan demand in 2013 largely stemmed from investors starving for yield and aiming to hedge against an eventual rise in short-term interest rates. Enhanced credit profiles, an uptick in capital expenditures from low levels in 2013 and a low default environment are also expected to support another year of healthy issuance.
Uncertainties about when the Federal Reserve will begin raising short-term interest rates will likely continue to support demand for the floating-rate leveraged loan product.
The effect of new CLO regulations on the leveraged loan space will be the wild card. Risk retention rules may chill the CLO market by lowering the demand for new loans. However, CLO issuance could be pulled forward in 2014, as these requirements would only become effective two years after the final adoption of the rules.
Banks are in varying stages of Basel adoption and many see this as the catalyst that could lead to changes in capacity and terms and conditions
Pressure on banks to increase lending standards could weigh on loan issuance. Regulatory pressures may restrict private-to-private leveraged buyout deals more than public-to-private LBO transactions in 2014, given that the former carry higher leverage. Pressure from regulators could also shift some lower-quality loan supply to the bond market from issuer-friendly features, such as covenant-lite packages.
New-issue activity tied to M&A is also expected to permeate the middle market space, which is ripe for a more fruitful M&A environment in 2014. This, as the long hovering fog of uncertainty that has stymied investment activity appears to be lifting, giving way to improved visibility for lenders, borrowers and private equity sponsors alike.
Increased economic confidence, more certainty with respect to the Fed tapering, and fewer concerns about a potential government stalemate over the budget are paving the way for greater willingness to buy, sell and invest in middle market companies.
In the investment-grade market, lenders anticipate a slowdown in refinancing activity and are hopeful that M&A lending will maintain momentum to reach an estimated US$160bn, up from US$133bn in 2013. However, though dialogue with clients regarding refinancing and potential M&A transactions is ongoing, there is little visibility on whether it will translate into new activity.
Despite intense competition among banks to lend, pricing and tenor are expected to remain fairly stable as issuers continue to pursue extensions to push out tenors. Bankers are optimistic that volumes in 2014 will be stronger than the last two years.
Banks are in varying stages of Basel adoption and many see this as the catalyst that could lead to changes in capacity and terms and conditions.
Michelle Sierra, Natalie Wright, Leela Parker Deo