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US leveraged loan primary market activity slows in May; break prices hold steady

The volume of new institutional term loans that entered the secondary trading market finally subsided in May, totaling just $35.4 billion for the month, down roughly 40% from April. The U.S. leveraged loan new-issue market had been on a tear since the start of the year, with $167.1 billion of first-lien term loans breaking for trading in the three months from February through April, according to LCD.

Additionally, the number of deals allocated to investors dropped to 52 in May, down from 68 in April, 88 in March and 91 in February. That is the lowest deal count so far in 2021, though it still tops the 43 deals that broke for trading in December 2020.

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While the volume and number of deals allocating in May declined significantly from the previous several months, the average break price at which those deals entered the secondary market was virtually unchanged from April, at 99.83% of par, from 99.81% in April. The average break price remains below the recent peak of 100.34% in January as repricings — which are typically offered to investors at par — faded from the market and as LBO and M&A activity, which can entail more complicated transactions, constituted a larger portion of deals.

New credits backing LBOs accounted for the largest portion of volume in May, at 34%, compared to 32% in April, while the share of M&A transactions dipped to 19% in May, from 23% in April. Five LBO deals topped $1 billion in May, with the largest being the $2.25 billion first-lien term loan due 2028 (L+500, 0.75% Libor floor) that backed the buyout of McAfee Enterprise by a consortium led by Symphony Technology Group, and which included AlpInvest. Refinancings picked up marginally, accounting for 26% of volume.

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The number of term loans that featured issuer-friendly flexes was the same in May as in April, at 22, though as a percentage of deals the figure jumped to 42%, from 32%. Meanwhile, the number of flexes wider dropped to 8 in May, from 12 the previous month, or 15% compared to 18%.

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New-issue deals that allocated to the secondary in May skewed lower down the rating spectrum than in April, with 42% of the volume rated B- on at least one side and only 37% rated B+ or higher. That compares to 25% and 58%, respectively, for the same rating buckets in April.

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Once in the secondary, loans that allocated in May fared fairly well amid a solid and steady secondary market. By month-end, the average bid of such loans dipped to 99.65, down just 18 basis points from the average break price of 99.83. For reference, the S&P/LSTA Leveraged Loan Index posted a total return of 0.58% in May, better than both March and April, though still below the more robust returns of the first two months of the year.

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The average new-issue price of deals allocated in May ticked up just 5 bps from the level in April, to 99.25% of par. Though minimal, it is the first increase in the monthly average new-issue price since January 2021, when the average issue price jumped 60 bps, to 99.70.

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The gap between the average new-issue price and the average break price held relatively steady, ticking lower by just 3 bps, to 58 bps, from 61 bps in April. The gap has been between 55 bps and 64 bps so far in 2021 after significantly widening last spring, hitting as high as 113 bps in May 2020, the first month featuring new deals after a two-month, pandemic-inspired hiatus.

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Finally, the average new-issue yield to maturity of loans breaking for trading ticked down in May. The average yield to maturity fell to 4.53%, from 4.75% in April. Meanwhile, the average spread to maturity also dipped, to L+371, from L+386 in April.

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