With the clouds breaking in the leveraged loan market in the second half of 2020, market participants are looking ahead to 2021 with optimism, and for a potential rebound in primary market issuance. Central to the outlook is further economic recovery and COVID-19 vaccine distribution, but uncertainties of the pandemic pose a risk to the rosier viewpoint.
Arrangers and investors say they are preparing what could be a strong start to 2021, building on the momentum into year-end 2020 (both total M&A and LBO supply were at record levels for the month of December). Acquisition pipelines are filling up with sponsor-backed transactions and growing corporate M&A, offering bright prospects for the new-issue market, at least for the first half of the year.
Market prognosticators have made the case that overall issuance next year will rebound from the 2020 slump, driven by resurgent M&A dealmaking. Both overall and M&A issuance would be building off multi-year lows. In 2020, total institutional loan volume through Dec. 18 was $288.5 billion, a five-year low according to LCD, and M&A volume was its weakest since 2012, at $146.8 billion.
New money issuance is forecasted to rise 10% in 2021, to $300 billion, and gross issuance, including repricings, may be around $380 billion, according to a Nov. 23 BofA Global Research report on the 2021 outlook for the loan market. That estimate is hitched to expectations for a 25% year-over-year rise in corporate M&A and a 15% increase in sponsor-backed deals, while refinancing activity is expected to decline.
Analysts at Barclays Research see U.S. loan supply rebounding to $320 billion to $340 billion, with higher year-over-year refinancing in addition to anticipated increases in the M&A and LBO categories. Wells Fargo is also forecasting a rise 2021, with gross issuance of $350 billion.
Private equity-backed firms certainly seem inclined to oblige, as the late 2020 flurry of deals indicate. LBO financing in the leveraged loan market plunged earlier this year but gathered momentum in the fourth quarter, with volume at a five-quarter high of $23.4 billion. Moreover, a flurry of LBO and M&A announcements from sponsored companies in November and December appear to be providing fodder for the new year.
Private equity executives seem upbeat about the 2021 prospects as well, as the economy recovers and confidence grows. And as has been the story for some time, PE firms are sitting on heaps of capital to put to work.
According to Preqin, dry powder in North America-focused private equity funds totaled $869.8 billion as of December 2020, up from $771.7 billion as of December 2019.
Not all are projecting a loan market supply turnaround in the year ahead, however. Analysts at J.P. Morgan said in November that expected 2021 gross issuance would decline by 30%, to $275 billion, "amid little to no repricing activity," while volume net of refinancing and repricings would be down a more modest 10%, to $150 billion.
Refinancing volume in the loan market was down 18% year over year in 2020, to $80.4 billion (as of Dec. 18). Looking at near-term maturities, loans in the S&P/LSTA Leveraged Loan Index that come due in 2021 and 2022 were whittled down to $38.5 billion, whereas they had totaled $109.3 billion at year-end 2019. For comparison, that’s less than the $49.1 billion of comparable near-term maturities facing the market at the outset of 2020. The maturity wall ramps up thereafter, to $94.4 billion in 2023 and $260.1 billion in 2024.
Borrowers sought covenant-relief transactions at a record pace in 2020 amid the swift economic downturn, and market participants expect that will continue to be in focus in 2021. When asked for LCD’s 2021 Leveraged Loan Survey what forms of capital structure renegotiations they expect to see next year, amendment and covenant relief activity topped the list at 45%. That was followed by debt-for-debt exchanges at 18% and prepackaged bankruptcy at 17%.
With CLO issuance also expected to rebound next year, there will be a strong technical underpinning for the market. CLOs, which are the largest consumer of leveraged loans, saw issuance levels fall roughly 23% in 2020 through Dec. 18, to $91.7 billion. Most in the market expect higher volume in 2021. Barclays forecasts $90 billion to $100 billion of CLO issuance, BofA $110 billion, Citi $100 billion, and J.P. Morgan $90 billion.