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Leveraged loan break prices fall in April as M&A, LBOs highlight busy market

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Leveraged loan break prices fall in April as M&A, LBOs highlight busy market

The pace of newly syndicated U.S. leveraged loans entering the trading market increased further in April, rising for the fifth straight month and reaching a whopping $58.8 billion. That is the second-highest monthly total since LCD began tracking this figure, behind only the $60.4 billion recorded in February 2013, and is up from $55.3 billion in March 2021. This year has now featured three of the top six months of break volume on record, in just the first four months of the year.

While the volume of the institutional term loans allocating for trading continues to rise, the number of deals across which that volume has come continues to fall. Just 68 institutional loans — the type of debt bought by CLOs and retail loan funds — broke for trading in April, down from 88 in March and 91 in February. Repricing transactions, which do not count toward the new-issue volume figure, have all but ceased, with just three such deals allocating in April, after a tsunami of repricings at the start of 2021.

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Much like in March, the decline in repricings — which typically are offered to investors at par — along with an explosion in term loans backing leveraged buyouts and M&A, has resulted in the average new-issue price dipping further in April. Subsequently, the average price at which U.S. leveraged loans entered the trading market last month dipped as well. The average break price dropped to 99.81% of par, from 99.99% in March, according to LCD.

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The volume of the new deals allocating in April backing LBOs and M&A totaled 32% and 23%, respectively, in April, while refinancing activity accounted for 32% of the volume, down significantly from 62% in March. Furthermore, the average new-issue issue prices of those LBO and M&A deals in the month were 99.15 and 99.00, compared to a 99.43 average for the refinancing transactions.

There were 11 LBO and M&A deals sized at more than $1 billion in April, including the $3.25 billion first-lien term loan (L+350, 0.50% Libor floor) backing the buyout of CoreLogic Inc. by Stone Point Capital and Insight Partners, and the $3.1 billion dollar-denominated term loan B (L+350, 0.50% Libor floor) backing Jazz Pharmaceuticals PLC's acquisition of GW Pharmaceuticals. The largest term loan of the month, however, was a refinancing transaction, with United Airlines Holdings Inc. pricing a $5 billion term loan B (L+375, 0.75% Libor floor).

While investor demand for the floating-rate asset class remains strong, the number of deals that flexed in favor of lenders increased in April, while the number of issuer-friendly flexes decreased marginally from the previous month. Of the 68 deals allocating in April, 12 flexed wider, representing 18% of the deals, its highest share since November 2020 and up from around 6% in March. Meanwhile, 32% of the deals flexed downward, or in favor of issuers, and 50% of the deals did not flex from initial price guidance.

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There was a shift back toward higher-rated deals in April, with 58% of the volume allocated during the month sporting a B+ or higher rating, up from 36% in March. The share of deals with a B- rating on at least one side and B flat deals dropped to 25% and 15% in April, down from 41% and 23%, respectively the previous month.

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Once in the secondary, loans that allocated in April fared slightly better than in March, as the secondary loan market recovered from its slight slip the previous month. By month-end the average bid of those deals allocating to the secondary dipped to 99.55, some 26 basis points lower than the average break price of 99.81. That compares to a drop by month-end in March of 48 bps and a drop of 22 bps in February. For reference, the S&P/LSTA Leveraged Loan Index posted a total return of 0.51% in April, compared to a very slight 0.0025% decline in March, the first month in the red since dramatic sell-off in March 2020.

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The average new-issue price of deals allocated in April dropped 24 bps to 99.20% of par, from 99.44 in March, marking the third consecutive month with a lower average new-issue price and the lowest level since December 2020. As with March, the lack of repricing transactions in April helped to contribute to a lower average new-issue price.

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The gap between the average new-issue price and the average break price ticked back up for the first time since December 2020, widening six basis points to 61 bps, from 55 bps in March. The gap still remains well below the average over the past 12 months of 72 bps.

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Finally, the average yield to maturity continues to inch higher, though it remains at historically low levels below 5% after reaching all-time lows just two months ago. The average yield to maturity jumped to 4.75% in April, from 4.38% in March and 4.13% in February. Additionally, the average spread to maturity widened to L+386, 22 bps higher than the L+364 recorded in March.

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