Reuters: Money: Refinancings drive first quarter leveraged lending, M&A absent

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Refinancings drive first quarter leveraged lending, M&A absent Mar 30th 2012, 13:20 By Ioana Barza Fri Mar 30, 2012 9:20am EDT NEW YORK, March 30 (RLPC) - Volatility subsided in the first quarter of 2012 following the shorter, steeper cycles observed last year. As a result, 1Q12 high yield volumes were robust, but they were driven by refinancings rather than new money transactions, according to Thomson Reuters LPC data. Bond investors poured more cash into high yield bond mutual funds in the first three months of 2012, at $19 billion, than in each of the last two full years, which totaled around $14 billion each, according to Lipper FMI. 1Q12 high yield bond issuance broke the prior $83.25 billion record set in 4Q10, reaching $88 billion. 1Q12 U.S. leveraged loan lending was up 42 percent from the prior quarter, at $144 billion, while institutional loan issuance doubled to $60.52 billion, according to Thomson Reuters LPC. The outlook for merger and acquisition financings remains muted. Strategics and private equity buyers may be sitting on cash, but are reluctant to pull the trigger on new M&A transactions. A few factors are at play: the buyer/seller mismatch given a rapid rise in valuations, an election year and global macroeconomic uncertainty. The absence of M&A transactions, coupled with strong investor demand for loans, led to issuers pursuing refinancings or amend and extends. Some were running up against their maturities while others refinanced opportunistically bringing aggressive deals to market that tested investors' tolerance for low yields. Heading into 2Q12, investor demand continues to outpace supply of new loan product and arrangers are competing fiercely to book deals. Structures may begin to deteriorate given that yields in the institutional market have already tightened significantly. A post-crisis record, $29 billion of high yield bond proceeds was used to pay down loans in 1Q12, leaving investors with extra cash to reinvest from prepayments. However, the makeup of the loan investor base continues to shift. Weekly loan mutual fund flows were flat to down, totaling a positive $106 million through March, compared to $14 billion last year, according to Lipper FMI. Conversely, collateralized loan obligation (CLO) issuance gained traction with $5.65 billion priced this year and another roughly $2 billion in market, according to Thomson Reuters LPC. Market sources expect that CLO issuance could reach $20-25 billion this year, compared to $13.24 billion in 2011 and $4 billion in 2010. However, given the volume of existing CLOs reaching the end of their re-investment periods, net new CLO demand remains negative. CLOs currently hold roughly $250 billion in loans with roughly 25 percent of the underlying loan volume coming due in 2014 and nearly 60 percent coming due between 2016 and 2018, according to LPC Collateral. Banks also sought high-quality leveraged paper in 1Q12, and at $83.5 billion, leveraged pro rata lending outpaced the $60.53 billion in institutional issuance. Banks have consistently remained active buyers in the past few years. Given recent investor pushback, there may be a yield threshold in the institutional space. Meanwhile, market players expect yields may fall further on pro rata paper on the back of strong demand from banks. However, rising cost of funds and capital constraints continue to plague select continental European banks. Lenders say spreads on investment grade loans, both drawn and undrawn, will stabilize in the near term as a result. Investment grade lending was down 54 percent in 1Q12 relative to the prior quarter's $116.82 billion, and down 20 percent from 1Q11. Heading into 2012, most issuers had already addressed their 2012-2013 maturities, rushing to get ahead of regulatory changes and shifts in bank appetite by locking in longer tenors and favorable terms. According to Thomson Reuters LPC's quarterly survey, 20 percent of investment grade lenders are more constrained this year with regard to total availability of capital while only 10 percent are less constrained. Lenders that are constrained have remained active but selective. In a dynamic regulatory and economic environment, lenders are carefully evaluating relationships and deploying capital strategically. These lenders are exiting or reducing commitments in cases where they cannot justify the relationship, but in others, they are stepping up for a bigger role. Variability in bank behavior will be one the biggest challenges for the investment grade market in 2Q12. (Reporting By Thomson Reuters Loan Pricing Corp analyst Ioana Barza) Link this Share this Digg this Email Reprints

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