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US leveraged loan break prices hold steady amid new-issue onslaught in February

The volume of new institutional term loans that entered the secondary trading market in February ballooned to $53 billion, compared to $29.4 billion the month prior, according to LCD. That is the fourth highest monthly total since LCD began tracking the figure and is the largest volume since $54.4 billion hit the secondary in March 2017.

The $53 billion in volume came across 58 institutional term loans. In addition, there were 33 repricing transactions that do not count toward the new volume figure. The combined total of 91 deals in February is the highest monthly total since 95 deals allocated in June 2018.

In a leveraged loan repricing, a borrower returns to market to reduce the Libor spread on an existing loan, taking advantage of investor demand, as opposed to the more cumbersome and expensive process of undertaking a new loan or a refinancing proper.

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With the surge in allocations in what was one of the busiest months in several years, the average price at which U.S. leveraged loans entered the secondary trading market in February held steady from the month prior at 100.25% of par, compared to 100.34% in January. Loans in February entered a slightly less fervent secondary market compared to the red-hot start of the year. The S&P/LSTA Leveraged Loan Index returned 0.59% in February, compared to 1.19% in January.

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While conditions remained accommodative for borrowers in February, the pace at which deals flexed in favor of issuers eased off the lofty levels from the prior two months. Just 25% of the deals flexed tighter in February, compared to 52% and 72% in January and December, respectively. The average size of the flex tighter also dipped marginally to 36 basis points, from 38 bps in January. Meanwhile, five loans, or roughly 5%, flexed wider, compared to 2%, or just one deal, in each of the last two months.

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The ratings mix in February was nearly evenly spread, with 31% rated B- on at least one side, 34% rated B flat, and 35% rated B+ or higher. That compares to 41% rated B- on at least one side in January and 44% rated B+ or higher. Lower rated issuance has soared so far in 2021 as investor demand continues to outpace the supply this year and investors continue their reach for yield. While the percentage of total volume of these deals with a B- rating decreased in February, the total volume of these deals still easily surpassed January’s total, at $16.2 billion versus $12.1 billion.

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Once in the secondary, the average bid of loans that allocated in February dipped slightly by month end from the average break price. By month end, the average bid was 100.03, from an average of 100.25 on the break. Loans breaking for trading in February entered a cooler secondary loan market than in January, when loans shot higher to kick off the new year.

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While the volume and number of deals freeing to trade soared in February, jumping 81% and 47%, respectively, from the previous month, the average new-issue price of those deals was virtually unchanged from January at 99.69% of par, from 99.70.

Refinancing transactions dominated in February, accounting for 48% of the new issue volume allocating during the month as more and more issuers take advantage of the strong conditions in the new-issue market, up from 29% in January. M&A activity also jumped to 26% of the volume, from 18% in January, buoyed by Peraton Corp.'s $5.92 billion first-lien term loan due 2028 (L+375, 0.75% Libor floor) backing the company’s acquisition of the federal IT and mission support services business of Northrop Grumman and its acquisition of Perspecta. The deal was the largest term loan to price since 2018.

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The gap between the average new-issue price and the average break price continued to decline in February, dropping to 56 bps, compared to 64 bps and 81 bps in January and December 2020, respectively.

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Finally, the average yield to maturity hit another all-time low in February dating back to records kept since 2006, at 4.13%, compared to 4.20% in January, while the average spread to maturity held at L+350. Yields continued to grind lower amid the accommodative conditions and the strong investor demand for the asset class.

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