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US leveraged loan break prices jump, volume surges in final month of 2020

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US leveraged loan break prices jump, volume surges in final month of 2020

The average price at which U.S. leveraged loans entered the secondary trading market ballooned 68 basis points month over month, to 99.91% of par, in December 2020. That is the highest level recorded since before the loan market dislocation in March 2020.

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Alongside the increase in the average break price, the volume of new issue institutional first-lien term loans allocating to the secondary in December ticked back up after a dip in the previous month. Volume climbed to $26.3 billion in December across 43 deals, from $21.4 billion across 31 deals in November. That is below October's total of $36.4 billion across 58 deals, but still represents the second-highest monthly volume since the loan market reopened in May 2020 following a two-month hiatus at the start of the coronavirus pandemic.

The largest term loans to allocate in December were split across several deal types, including refinancing transactions, leveraged buyouts and M&A transactions. The largest of the month was Asurion LLC's $3.1 billion term loan B-8 due 2026 (L+325, 0% Libor floor) that refinanced the issuer's B-4 term loan due August 2022 and a portion of its B-6 term loan due November 2023. That deal is followed by the $1.35 billion term loan B due 2027 (L+375, 0.75% floor) backing the acquisition of a majority stake in US LBM Holdings Inc. by Bain Capital Private Equity, and then Aspen Dental Management Inc.'s $1.2 billion non-fungible first-lien term loan due 2027 (L+400, 0.75% floor) that backed its acquisition of ClearChoice Management Services.

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In a change from the previous two months, flex activity in December shifted dramatically back in favor of issuers after a more balanced mix of flex activity in October and November. Of the 32 deals that flexed from initial guidance last month, all but one flexed tighter, representing 72% of the total number of deals that allocated in December. That is the highest percentage of deals to see issuer friendly flexes in a month since the figure hit 76% in August 2020, which itself was the highest level since January 2013.

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Meanwhile, the credit quality of deals allocating in December shifted toward higher rated loans with B+ or higher deals accounting for 40% of the volume, compared to just 13% of the volume in November, and B- on at least one side deals dipping to 43%, from 49% in the month prior. The bulk of the shift, however, came from the B flat category, which dropped to just 13% of deals in December, from 35% in the previous month.

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Once in the secondary, loans allocated in December declined 31 basis points on average by month-end. By comparison, loans allocating in November declined by an average of 21 basis points by the end of that month. The S&P/LSTA Leveraged Loan Index returned 1.35% in December, down from November's 2.23% return, which was the third-highest monthly gain for the index in 2020. While the deals breaking in December gave up slightly more by month-end from their break price than in the previous month, the average month-end price, at 99.60, was still 50 basis points above the average new-issue price for the month.

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The average new-issue price of deals allocating to the secondary jumped 54 basis points in December from November, to 99.10% of par, as the share of higher-rated deals increased and market conditions continued to shift favorably toward issuers. At 99.10, it is the highest average new-issue price since the reopening of the loan market in May, with September being the only other month since the reopening over 99, at 99.05.

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The gap between the average new-issue price and the average break price widened to 81 basis points in December, from 68 basis points in November, as the average break price notched its impressive climb last month.

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Finally, the change in the average spread and yield to maturity of deals breaking in December was modest, with the average spread dropping to L+406 and the yield to maturity dropping to 5.08%, from L+422 and 5.40%, respectively, in November.

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