Outlook 2015: Issuance could drop as regulations weigh on issuers

By Sara Rosenberg

New York, Jan. 2 – Total primary leveraged loan issuance is expected to decline in 2015 when compared to 2014 as new regulations may make it more difficult or less attractive for companies to enter the market, according to sources.

“No clue on numbers, but between CLO [regulations], mutual fund flows, prior refinancings and Leveraged Lending Guidance, I have to believe issuance will be down in 2015. If the Fed starts raising rates, issuance could start going up with fund flows, both retail and institutional,” a buyside source said.

“Consensus is for the Fed to raise rates in 2015. No reason to disagree.

“How issuance will compare, when it comes to Fed-inspired refis, depends [on] when the Fed raises. If it’s June and the signal is more and many to come, refis will pick up quickly. If it’s September and the signal is few and slowly, refis won’t pick up much in calendar 2015. Issuance would be restrained by all the factors I listed, but the timing and nature of Fed action is a wild card underappreciated by the market for its implications for issuance and market strength,” the buyside source added.

A sellside source said that issuance in 2015 versus 2014 will be flat to down. He put total 2014 issuance at about $525 billion.

The sellside source went on to remark that dividends especially will be more difficult because of the Federal Reserve, refinancing activity will likely be flat and acquisition/leveraged buyout activity will also be flat.

Additionally, the sellside source pointed out that leveraged buyouts in 2015 will likely see a trend of multiple bidders in consortiums stemming from Federal Reserve and CLO regulation. These bigger buyout groups will result in more equity being used in the transactions.

A second sellside source explained that he expects issuance to be down on a year-over-year basis, with merger and acquisition activity as well as leveraged buyout activity lower due to “Fed scrutiny and increasing borrowing costs.”

Meanwhile, a market professional agreed that total issuance will be lower, with refinancings, dividend deals and leveraged buyouts all taking a hit, but he thinks that merger and acquisition volume may see an increase.

“Issuance [will be] down in first half [of 2015] due to low rates and continued outflows, but could turn around in the second half,” the market professional remarked.

The market professional put total institutional issuance in 2014 at about $380 billion and expected institutional issuance in 2015 in the area of $325 billion to $350 billion.

Second-liens to decline

The total amount of second-lien term loans to be issued in 2015 is anticipated to reduce when compared to 2014 due to regulations and fallout from recent volatility in the energy sector, according to sources.

“Second-liens may be cut back by Leveraged Lending Guidance – replaced with more high-yield. Cautious fund managers may also reduce demand. Down somewhat is my best guess,” the buyside source said.

“Lots of energy names issued in 2014, and we’ll see a huge drop-off in energy names issued in 2015. A number of those 2014 deals were second-liens [as] ABL got the first-lien, so that will act to depress second-lien issuance in 2015,” the buyside source added.

A sellside source agreed that the amount of second-lien loans in 2015 will be down from 2014. He explained that it will become more difficult to distribute second-lien loans because of regulations and more leverage.

The sellside source also pointed out that some banks got stuck with second-liens that they underwrote in 2014 and they need to clear that out. As a result, some people are viewing that market as shut right now.

Another sellside source said that the amount of second-lien loans will decline on a year-over-year basis.

“As seen already, second-liens are the first to take a hit in the market, in [2014] due to lower oil prices. The second-lien market, I believe, will remain choppy,” the second sellside source continued.

Covenants may increase

Some sources think that the total amount of deals in 2015 with covenants may see a bit of an increase from 2014; however, there are others that believe the split between covenant and covenant-light deals will be relatively flat on a year-over-year basis.

“Leveraged Lending Guidance favors a maintenance financial covenant. On the margin that should mean slightly more deals have them in 2015, with an emphasis on slightly, and that’s probably more influenced by demand than [Lending Guidance],” the buyside source said.

A sellside source remarked that he expects the total amount of deals in 2015 with covenants to increase from 2014. He estimated that in 2014, 70% of deals were covenant-light and 30% had covenants, and in 2015, that will shift to 60% covenant-light and 40% with covenants.

As for which covenants will be present in deals, the sellside source said that secured leverage, total leverage and fixed charge coverage ratios will likely be the most prevalent covenants.

Another sellside source believes that the amount of deals with covenants in 2015 will be unchanged from 2014, and those deals that do have covenants will likely include a total leverage requirement of 6 times and a senior secured leverage requirement of 4 times, in line with the Federal Reserve mandate.

A market professional said that he too thinks the amount of covenant-light deals in 2015 will be similar to the amount in 2014. “More the norm now [to be covenant-light]. Covenanted is the exception,” he added.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.