The already hot U.S. leveraged loan asset class continues to gain steam, with repricings of existing credits — one of the hallmarks of an opportunistic market — reaching $102 billion so far in 2021, according to LCD.
While that year-to-date total slightly lags the hectic pace set in 2020, it is a pointed example of how institutional and retail investors have flocked to the $1.2 trillion floating rate segment of late.
Indeed, the renewed appetite for risk is such that, of the $102 billion in repricings this year, roughly 80% are from lower-rated, single-B issuers, compared to 54% at this point in the 2020 repricing wave.
In a leveraged loan repricing, an issuer returns to market to reduce borrowing costs on an existing credit — as opposed to the more cumbersome process of putting a new loan in place — taking advantage of investor demand.
So far in 2021, borrowers that have repriced loans trimmed an average of 66 bps from the credit's spread over Libor and have saved an average of 79 bps per repricing when factoring in the drop in the Libor floor since the credit was first originated, according to LCD.
Drilling down deeper, with relatively limited issuance of new leveraged loans in the first half of 2020, most of the credits being repriced now were originated before the COVID-19 pandemic. Those 53 repricers from pre-March 2020 deals cut the Libor spread by an average of 70 bps, while repricings on the 27 deals that were issued in the higher-cost environment, from March onward, saved a hefty 95 bps.
And in an illustration of the current hot market mode, repricing activity (via an amendment) so far in 2021 is outpacing issuance of new leveraged loans by some $14 billion.
About that investor appetite: For much of 2020, investors retreated from the loan segment, starting in March, when the usually stable asset class lost a whopping 12.37% after the COVID-19 onset. That retreat continued toward year-end until a combination of optimism regarding vaccines and the specter of rising Treasury rates helped steer investors back toward floating-rate debt, such as loans.
This demand for loan paper has pushed prices in the secondary skyward, particularly after the Pfizer vaccine news in November. Today, 44% of loans from issuers with a riskier single-B rating are quoted at 100 or better in the secondary, up from 14% at year-end 2020, while 38% of loans from a double-B rated issuer are at par or better, up from 12%, according to the S&P/LSTA Leveraged Loan Index.
Repricings of leveraged loans are one sign of an opportunistic market, where debt issuers take advantage of investor appetite for purposes other than M&A or LBOs, for example. Another type of opportunistic issuance is dividend recapitalizations, where issuers — usually private equity concerns — undertake a new or add-on loan for the portfolio company then withdraw cash from the company. Dividend activity has soared this year, with PE firms undertaking $6.6 billion of these deals in 2021 through Feb. 9, the fastest pace since 2017, according to LCD.