NEW YORK, June 28 (LPC) - US syndicated lending turned in a lackluster performance in the second quarter, amounting to the lowest 2Q total in seven years and dashing expectations for a meaningful boost to first half issuance following an already lean start to 2019.
Nearly US$563bn in loans was arranged in the second quarter, down roughly 35% from US$870bn for the same period last year, according to LPC, a unit of Refinitiv. This marks the lowest second quarter since 2012 when US$400.5bn was booked in the April to June period.
“The overall flow in the second quarter has been relatively disappointing. There has not been as much product and flow as investors and arrangers would have liked to see,” said Ted Swimmer, head of Corporate Finance and Capital Markets for Citizens Commercial Banking.
At just over US$1trn for the first and second quarters combined, syndicated loan volume was down 33% year over year making it the lowest first half total since 2016.
At US$442bn, total issuance was low in the first quarter. Nevertheless the loan market’s swift rebound from late 2018 volatility fueled expectations that renewed borrower confidence and solid appetite from bankers and investors looking to lend would give way to a healthier pace of deals.
“After coming from a severely down market in December, a recovery in January and February, a fairly robust market in March, the expectation was that activity would improve,” said Art de Pena, managing director and head of loan syndicate and distribution for MUFG.
Persistent macroeconomic and geopolitical uncertainties, however, gathered steam, clouded visibility and ushered in renewed caution. The constant swirl of trade war rhetoric, tariff concerns—and the as-yet-unknown impact on labor and materials costs—combined with the specter of conflict with Iran could not be ignored.
“The rhetoric around tariffs and knock-on effects on the economy put a damper on expectations and raised scrutiny among credit managers,” de Pena said.
Despite widely available capital at low borrowing costs, the reality of sky-high valuations against a backdrop of economic and political uncertainties produced a sense of hesitancy among corporate borrowers and private equity sponsors to pull the trigger on transformative transactions.
Rather, investment grade borrowers focused heavily on refinancing activity. Lending to investment grade-rated companies increased moderately to US$279.57bn from US$216.37bn last quarter, but was down approximately 14% from 2Q18. In the current quarter, with only US$57.19bn in new money volume, refinancing activity dominated issuance.
In leveraged lending, an absence of mega buyouts gave way to an emphasis on medium-sized takeovers as well as a focus on generating dealflow from existing portfolio companies, in particular the higher-quality credits. Investors were increasingly selective during the quarter, favoring repeat issuers and well-known borrowers that have performed through a cycle.
Private equity sponsors also continued to pursue growth opportunities via bolt-on acquisitions versus targeting new platforms.
Leveraged lending increased only marginally to US$188.68bn for the second quarter from US$165.66bn last quarter, but registered a 54% drop compared to the year-ago period.
Notably the record refinancing and repricing activity that took place in 2018 has largely been absent this year. Still, new money leveraged volume of US$89.38bn for the second quarter was also significantly lower compared to US$124.81bn for the same period last year.
“Q2 was disappointing in volume overall. The new money side of the market was the biggest disappointment,” de Pena said.
Despite two back-to-back quarters of thin volume, market participants remain optimistic for a busy second half, particularly if a trade deal is reached with China. A resolution on trade and tariffs could unleash a significant amount of capital, one leveraged lender said.
The unique combination of a strong equity market paired with low interest rates is already creating a strong bid for credit and the second half is expected to produce an uptick in leveraged M&A.
“We expect a relatively big pickup in M&A in the third and fourth quarters given the backlog,” Swimmer said.
In the middle market segment specifically, private equity capital is dominating event-driven transactions.
“There is very little corporate to corporate M&A going on and we don’t expect that to change anytime soon,” Swimmer said of the middle market. “Sponsors are the most likely buyer and continue to own the leveraged M&A activity.”
On the investment grade side, the US$38bn bridge loan backing US biopharmaceutical company AbbVie’s US$63bn bid to diversify its product offering with the purchase of Botox-maker Allergan provided a hefty boost to the pipeline. Bankers are said to be highly receptive to the deal, which has been a testament to the strength of the bank market and they hope heralds more to come.
“This is the most stability we have seen in the bank market in several years,” said Anish Shah, Global Head of Investment Grade Acquisition Finance at Morgan Stanley. (Reporting by Leela Parker Deo. Additional reporting by Michelle Sierra.)