The share of U.S. leveraged loans issued from borrowers with at least one B- or B3 rating is at its highest rate ever, at 34% of year-to-date volume through Nov. 10. While that rate is only marginally higher than either of the two prior years, it is perhaps more notable in 2020, when investor sentiment was decidedly risk-off for a painful stretch for the $1.2 trillion asset class, given the economic impact of the coronavirus pandemic.
Indeed, loan issuance is down across ratings brackets in 2020 (except for deals from CCC+ issuers, where it is up), but the decline is more pronounced in loans from issuers with B/B+ ratings (down 9% versus the same period in 2019) and from issuers rated BB- or higher (down 23%). The volume of these institutional loans to borrowers with a B- rating by at least one ratings agency is down 7% year over year. In fact, the BB- or better category has mustered just $12.7 billion in the second half of 2020, which would be the lowest output for any two consecutive quarters since Q3 and Q4 of 2011, according to LCD.
Data also shows that volume from the B- and B/B+ ratings categories is running neck and neck, at $83.0 billion and $82.6 billion, respectively, as of Nov. 10. There has never been a year where B- issuance was higher than B/B+ issuance, although the gap between the two ratings classes has narrowed in recent years. For the five years through year-end 2014, B/B+ issuance was on average $91.4 billion higher than B-, but in the five-year period ended Dec. 31, 2019, that average difference had winnowed to $50.5 billion.
In 2020, the increased B- share of total institutional loan volume was most pronounced in the third quarter, when it was 42%, an all-time high. The B/B+ volume share was 35% and the BB- figure was at a six-quarter low of 12%.
As investor demand reheated in the third quarter, that left the door open for opportunism. As such, recapitalization loans for B- issuers were at their highest level on record, at $8.1 billion. M&A loan volume for that cohort was at a four-quarter high in the third quarter, but overall B- M&A volume is still running short of prior years. Meanwhile, year-to-date 2020 recap and refinancing volumes are both ahead of 2019 full-year levels, according to LCD.