The shrinking loan market

Loans had a good year return-wise, with the LSTA leveraged loan index up over 13% for 2023, despite some of the hiccups we just mentioned. Sure, fundamental performance was part of it, but the imbalance between buyside demand and overall supply was the most persistent explanation. 

The loan market shrank by 2% this year, according to BofA research, thanks to the overall lack of M&A volume as well as borrowers turning to private credit or the bond market for new buyouts or refinancing.

“The addition of private credit to our market, now having a third option for borrowers, felt like a stabilizing force,” said Lauren Basmadjian, a managing director and co-head of liquid credit at Carlyle. “It was a positive to have a third option for lenders when financial conditions tighten, even if it’s more expensive.” 

For next year, LevFin bankers are hopeful that declining rates and a stable economy will bring borrowers back to broadly syndicated loans, where the covenants are light and the pricing is relatively cheap. Kohler Energy and Cotivitigive some hope. 

“You're going to see the better, higher-quality assets come to the syndicated loan market,” one banker said. 

Still, direct lenders aren’t going anywhere. That gives sponsors the chance to play debt providers against each other in financing new LBOs, especially as they seek customized capital structures. 

“I expect the dual track processes to be something that really heats up,” said Kris Ring, a partner at Goodwin Procter. “And I still think you’ll see sponsors push for PIK instruments while they wait for interest rates to drop.”

Prime time

Classify it as a lowlight for many debt investors, but the theme of cash-strapped companies pursuing priming deals and/or asset drop downs continued through 2023.

Robertshaw, which raised money via a loan from select lenders earlier this year is one example. And Michaels spooked some creditors when it moved a small e-commerce division into an unrestricted subsidiary, prompting memories of creditor-on-creditor violence from years past such as Envision Healthcare. 

Credit agreements are now being drafted to try and prevent such tactics, and creditors are signing non-aggression pacts. But sources we spoke to don’t expect a big change in sponsor behavior in 2024, which is informing trading decisions. 

“We’re very concerned about that and don’t feel well-protected,” said Randy Parrish, head of public credit at Voya Financial. “We are more inclined to sell than go into workout than we were five years ago.”

Crunch time

Traditional refinancing deals were made trickier by the number of CLOs exiting their reinvestment periods, which limited the ability of those vehicles to buy into new deals.

That made things complicated for borrowers with a CLO-heavy investor base, especially those with less-than-stellar balance sheets who had a hard time finding new lenders to replace them.

While that theme emerged in 2022, this year companies found ways around it, like offering shorter-dated new loans, turning to bonds or even trying coercive measures as Amneal Pharma did before reversing course and downsizing. 

Robust demand for loans might help ease this pressure next year, but it may be too late for companies that have already fallen out of favor.

“CLO reinvestment could still be a problem,” Basmadjian said. “For performing credit it’s fine, stuff in the mid-90s can still price. It’s harder for the underperforming credits.”

The biggest loans

With PE exits largely missing, a major driver of M&A activity was corporate divestitures and spinouts. 

One such deal that bankers and investors can thank for this year’s biggest loan was payment processor Worldpay’s $5.2bn TLB to fund a spinout from FIS, in September. The loan, as well as an accompanying $2.175bn SSN (plus some euro debt) went to back GTCR’s buyout at an $18.5bn valuation. 

Debt investors simply loved the deal, thanks to low leverage, a big equity cushion and the company’s market leading position. 

Second place goes to franchisor Restaurant Brands’ $5.175bn term loan refinancing, also in September. The market digested that deal well, because buysiders saw it as a play on consumers cutting back on spending, and opting for cheaper dining options at its portfolio of brands which includes Burger King and Popeyes. 

The biggest bonds

Oh Citrix, the source of much 9fin US news coverage, and (we assume) headaches for bankers involved in financing the original 2022 buyout. 

It also gave us one of this year’s biggest new-issue bond syndication in April, as banks offloaded $3.837bn in hung second-lien notes that were underwritten to fund the company’s acquisition by Evergreen Coast (the PE arm of Elliott Management) and Vista Equity, and its subsequent merger with TIBCO. 

That 9% bond due 2029 ultimately cleared at a 79 OID to yield over 14%. Fortunately for anyone who bought in at that price, it’s currently quoted at 95.21. 

In another example of how much the credit tide turned late in the year, Citrix even pulled off a dividend recap of sorts when used proceeds from a $1bn term loan in November to buy back preferred equity. 

Honorable mention goes to Venture Global LNG’s $4bn two-part bond package in October to refinance its term loan debt and buildout its LNG facilities. But like the loan market, the high yield universe is shrinking too, thanks in part to companies graduating to investment grade status.

Venture Global is seen as another potential rising star, if it can successfully complete its buildout while navigating growing legal challenges.

Hairiest situation 

There was no shortage of tricky deals navigating their way through levfin markets this year. For one, Global Aircraft Leasing is still working with Morgan Stanley to try and find a way to raise $2bn in debt to refinance bonds coming due in 2024.

But considering a deal is yet to emerge in that case, we’ll highlight Viasat's $733.4m 7.5% SUNs due 2031 to back its acquisition of Inmarsat. The notes were initially offered with an OID of 70 and later priced at 65 in September, the largest discount of the year. 

Not only was the acquisition funded by banks back in June, the company reported technical problems with its satellites both before and after the debt was syndicated.

Will anything compare in the coming year? Either way, we’re looking forward to covering the biggest and toughest debt deals of 2024 as we get ready to pop the bubbly this weekend.