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Leveraged loans enter secondary market at lower prices in July

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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