After a significant jump in June, the average price at which U.S. leveraged loans entered the secondary market fell 18 basis points in July, to 99.82% of par, from 100.00 the previous month, according to LCD. The volume of leveraged loans entering the secondary ticked down marginally in July, to $48.3 billion, from $48.5 billion in June, while the number of deals fell to 60, from 76.
A number of large credits broke for trading in July, including term loans each topping $3 billion for DIRECTV and Pilot Travel Centers LLC. In total, 17 term loans allocated to investors in July topped $1 billion, including five of at least $2 billion. That compares to only 10 deals topping $1 billion in June.
As in June, leveraged buyout and M&A activity comprised the majority of new issuance activity in July, with 61% of the volume backing such deals (it was 65% in June). The largest deals in each category were DIRECTV's $3.9 billion six-year term loan B (L+500, 0.75% Libor floor) that will finance the joint venture between AT&T Inc. and TPG Capital, and the $2.04 billion term loan (L+300, 0.50% floor) supporting the acquisition of First Student and First Transit by EQT Infrastructure.
Meanwhile, the share of deals featuring issuer-friendly price flexes during syndication in July receded, while the proportion of investor-friendly flexes doubled. The percentage of deals to flex tighter dropped to 42%, from 55%, while deals flexing wider increased to 17% in July from 8% the previous month. The share of deals flexing in investors' favor increased as investors began to push back against some of the riskier deals in the market.
For example, the $370 million term loan B backing the buyout of SVP Worldwide Inc. priced at L+675 and an original issue discount of 93, after launching at L+550-575 and an original issue discount of 98. In rating the loan, S&P Global Ratings early in July cited concern over the company's narrow focus in the mature, niche sewing industry that benefited in growth from COVID-19, as it could see a reversion to sub-par growth as global economies continue to reopen.
Conditions remain accommodative for issuers overall, however, as investor demand remains strong for the asset class.
The breakdown of deals allocating in July shifted slightly back toward higher-rated credits, after deals rated B-minus on at least one side reached a multi-month high of 47% in June. Loans rated B-minus on at least one side fell to 39% of deals entering the secondary in July, while loans rated B+ or higher rebounded to 47%, from 33% in the prior month. The 47% figure is the highest share for the B+ or higher-rated category since it sat at 58% in April.
Despite a relatively weak performance of the S&P/LSTA Leveraged Loan Index in July, amid a soft secondary, loans that allocated during the month fared only marginally worse than in June, dipping 39 bps by month-end, to 99.43% of par, from an average break price of 99.82. That compares to a drop of 24 bps in June and 18 bps in May. For reference, the overall index returned negative 0.01% in July, its worst monthly showing since the market dislocation in March 2020.
While not a significantly big difference, term loans backing M&A transactions, which accounted for the largest share of volume of any use of proceeds in July, fared slightly better by month-end than the overall figure. M&A deals were 34 bps lower, ending the month with an average bid of 99.49, from an average break price of 99.83.
The average new-issue price of deals allocating for trading in July fell 20 bps, to 99.29, from 99.49 in June. The new-issue price is back in line with levels seen in April and May of this year, but is well off the average price in the red-hot first three months of 2021.
The gap between the average new-issue price and the average break price was little changed in July, inching back up to 53 bps, from 51 bps the previous month.
Finally, the average new-issue yield to maturity of loans breaking for trading in July ticked back up to 4.58%, from 4.37% in the previous month, while the average spread to maturity gained 16 bps, to L+380, from L+364. The yield to maturity is back in line with the level seen in May after dropping in June.