Higher rates and market uncertainty dramatically reduced lending activity in the third quarter as borrowers digest higher borrowing costs. As potential liquidity issues mount, therein exists an opportunity for well capitalized capital providers
- Third quarter new-issue leveraged loan volume declined 67% to $67.2 billion from $202.6 billion in the third quarter of 2021. The decline is attributed to macroeconomic headwinds, market uncertainty, continued supply chain constraints and geopolitical turmoil
- Higher interest rates dramatically reduced refinancing activity to $2.6 billion in the third quarter, the lowest level since the first quarter of 2009. Volume has declined in each subsequent quarter since achieving record volume of $81 billion in the first quarter of 2021
- Despite a dramatic shift in market sentiment, the level of dry powder in the private credit market remains at an all-time high. Lenders will continue to selectively evaluate new loan opportunities with an underwriting focus on ample liquidity
- Opportunistic capital solutions – like junior debt and structured equity – could soon be in strong demand as fixed pricing, PIK interest, and convertible features are more accommodative to liquidity constrained borrowers
- Opportunistic capital solutions – like junior debt and structured equity – could soon be in strong demand as fixed pricing, PIK interest, and convertible features are more accommodative to liquidity constrained borrowers
New Issue Leveraged Loan Volume ($bn)
Source: LCD Quarterly Q3, 2022: Volume: Quarterly US Dollar Denominated New-Issue Global Leveraged Loans. Pg 166
Refinancing Loan Volume ($bn)
Source: LCD Quarterly Q3, 2022
Amid higher interest rates, fixed rate high yield bond issuance continued its downward trend in the third quarter, declining to a 14-year low
High Yield Volume ($bn)
Source: LCD Interactive High Yield Report, Monthly & Quarterly Volume tab
- Third-quarter issuance was $18.9 billion, down 82% year-over-year, compared to $108 billion for the same period in 2021
- The average yield at issuance was 7.85% in the third quarter, up 163 bps from the first quarter; and the highest levels seen since 2011
The Fed raised interest rates by 75bps in September, citing continued upward inflationary pressure, with future rate hikes on the table, which will be inflationary data-dependent
High Yield - Average New Issue Yields
Source: LCD Interactive High Yield Report, Monthly & Quarterly Volume tab
- The 350+ increase in the SOFR base rate has shifted lender focus to portfolio companies as higher interest expense puts pressure on cash flows and liquidity
- SOFR Floors were non-existent in 2021 in a low-rate environment, but have become increasingly common in 2022: Banks ~2.00%; Non-banks ~2.50%
We hope you find this information valuable, and as always, feel free to reach out if you would like to discuss in further detail. To read the full report, download the PDF below.
