US and European leveraged loan markets record massive increases in issuance as issuers race to refinance
Leveraged loan activity in the US and Europe sprang back to life in H1 2024, with both markets enjoying near-triple-digit increases in issuance.
In the US, overall issuance surged 95.7% from US$461 billion in H1 2023 to US$902.5 billion in H1 2024. The European market enjoyed a similar rally, with H1 2024 issuance climbing by 96.5% year-on-year, from US$91.8 billion to US$180.4 billion.
Overall Issuance by value Q2 2021 – Q2 2024
Instrument type: Leveraged loans Use of proceeds: All
Location: Western and Southern Europe and USA Sectors: All Sectors
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However, the rebound in issuance in Western markets was not mirrored in Asia. Issuance of leveraged and non-leveraged loans in APAC (excl. Japan) declined by almost a third year-on-year, from US$143.7 billion to US$98.3 in H1 2024.
Refinancing rockets to spur US activity
A wave of refinancing and dividend recap activity bolstered the year-on-year rebound in US leveraged loan issuance. Through H1, the improving economic outlook encouraged investors to increase allocations toward riskier assets and pump liquidity into leveraged loan markets.
Debtwire reported an almost 500% year-on-year increase in refinancing activity in H1 2024 as borrowers seized opportunities to refinance existing debt facilities and capitalize on friendlier market conditions to extend loan maturities.
Pricing has been another favorable factor for borrowers who are refinancing—Debtwire data show that average margins on first-lien institutional loans stood at 3.37% in Q2 2024, the lowest quarterly average recorded in more than two years. Although the Federal Reserve has not yet cut interest rates, tightening margins have eased debt servicing costs significantly. Moreover, with a US rate cut expected to come in September, the outlook for borrowing costs for the rest of 2024 and 2025 is brightening.
An increase in investor risk appetite has also enabled borrowers to issue a higher volume of second-lien debt (US$1.74 billion) and secure higher leverage multiples, with gross leverage multiples rising to 4.7x in H1, up from 4.46x in H1 2023. Dividend recaps are also back on the table—rising by 212% year-on-year in H1 2024—as shareholders faced with choppy M&A and IPO markets have turned to credit markets to unlock cash and made distributions to investors.
Europe tracks US refinancing rise
As in the US, refinancing catalyzed Europe’s strong recovery in leverage loan issuance in H1. Year-on-year, refinancing was up by more than two-thirds from US$54.3 billion in H1 2023 to US$90.7 billion in H1 2024.
Following H1 2024, European loan borrowers have benefitted from cuts to base rates in the European Union and UK. In June, the European Central Bank cut its main interest rate for the first time in five years, reducing the rate by a quarter point to 3.75%. In August, the Bank of England followed suit, reducing rates for the first time since 2020 by a quarter point to 5%.
This anticipated reduction in benchmark rates has been complemented by tighter margins. Debtwire data show that the average margins on institutional loans fell to 4.16% in Q2 2024, the lowest level in more than two years. Higher-rated BB credits have been able to secure even better margins, tapering to 3.23%, the narrowest quarterly margin since early 2022.
As borrowing costs have fallen and investor appetite for risk has recovered, European borrowers have also had access to higher levels of leverage. Average gross and net leverage multiples stood at 5x and 4.6x, respectively, in H1, having risen consistently since the start of 2023, up from 4.3x and 3.9x in H1 2023.
Although the market is improving for borrowers, this is not the time to get carried away. A cluster of shelved repricing deals—in which borrowers seek to negotiate lower margins on existing facilities rather than replace financing with new debt—demonstrates there are still limitations on the cost of capital that borrowers can reasonably expect when coming to market.
Slow growth in China dampens debt demand
Loan markets in APAC (excl. Japan) have not been lifted by the same pricing and investor appetite tailwinds that have buoyed issuance in the West.
The region’s largest and most important economy, China, has continued to grapple with slower-than-expected growth as a result of weak domestic consumption and the lingering fallout from a liquidity crunch in its crucial real estate industry. This has stifled both lender risk appetite and borrower demand for debt.
China’s central bank has cut interest rates to support growth and its government has outlined a series of stimulus measures to boost the economy and fund spending. But it will take time for these interventions to have a positive impact on loan issuance.
Despite the headwinds in the Chinese market, there have been some bright spots. Sustainability-linked loan issuance has shown steady year-on-year gains even though the loan market overall has retracted, reflecting the increasing focus on ESG and sustainability across the region. According to Bloomberg, year-on-year sustainability-linked loan issuance almost doubled in H1 2024.
Sustained momentum in the sustainability-linked loan space and a recovery in mainstream loan issuance would be a boon for both borrowers and lenders. This, coupled with a return to form for the Chinese economy, could drive an uptick in issuance through H2 2024 and early 2025.
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