Outlook 2020: Leveraged loan issuance anticipated to be flat to down

By Sara Rosenberg

New York, Dec. 31 – Total primary loan issuance is expected to be flat to lower in 2020 when compared to 2019, with refinancing/repricing activity likely overshadowing mergers and acquisitions transaction volume.

“Issuance down. B2s and B3s disfavored but that’s where the issuance would like to be because the BBs are so picked over. This is new issuance, not repricings. Repricings will be up as thirst for quality drives acceptable coupons lower,” a buyside source commented.

“I do expect B2/3 issuance to be tougher in 2020, but some will get done with coupons and OIDs and maybe faster amortization schedules. I think there is huge demand for B1 and up, but I wonder if the supply exists,” the buyside source added.

A sellside source said that he expects issuance to be “flat versus 2019. Refinancings for higher rated credits continue. M&A volume strong in Q1 but weak rest of the year. Repricings for BB credits continue, but don’t think anyone gets to L+150.”

Another sellside source remarked that he expects volume “to be off Q1 with a hopeful pickup in Q2. Steady year as the maturity wall builds, but will be in line with general economy. If the current market bifurcation persists, then repricing and refinancings will continue to outweigh any M&A activity.”

Second-liens placement

In 2019, a large portion of second-lien term loans were privately placed, and that trend is expected to carry on into 2020.

“Will continue to see them privately placed. Little will actually be syndicated. Think 75% of the second-liens were privately placed this year,” a sellside source said.

“Second-lien issuance down and/or not syndicated due to late-cycle quality bias. I think second-liens were mostly privately placed in 2019 because the sponsor wants a direct relationship at that level in case of credit problems,” a buyside source remarked.

“I think that one reason why there was such a rise in privately placed second-liens is mark to market risk. Directly lending to a company allows you to go over the wall as you won’t have any other trading counterparts, and allows you to better structure what you believe are proper terms for the respective credit, which will not drop multiple points anytime there is a single seller away from you as is the case with many illiquid syndicated second-lien loans,” another source added.

Covenants unchanged

Covenants in 2020 loan transactions are expected to pretty much be in line with those seen in 2019 loan deals.

“Covenants reflect supply and demand. I expect insufficient supply so covenants will remain loose. Covenants are an arms race among sponsors and only negative actual consequences from those covenants will drive the buyside to push back, [which is] probably not going to happen until the next recession,” a buyside source remarked.

Two sellside sources said that covenants will probably be “the same” in 2020 when compared to 2019.

Notable trends

Some notable trends noticed in 2019 by sources was the flight to higher quality paper and the use of direct lenders.

“Everybody wants BBs, from CLOs to mutual funds to institutional accounts, especially foreign accounts. CLOs want to sell B2s and B3s before they become CCCs. There is only so far those can be pushed down before it makes no sense for CLO managers to lose that par. While they may stop going down, it will be hard for them to go up a lot pre-recession,” a buyside source remarked.

“I think there will be a natural rotation out of the up-in-quality trade as portfolio managers [who] piled into BB paper toward year-end to lock in and protect great performance have to outperform again [once the year ends]. It will be hard to beat indices that have B and CCC paper in them while only holding BBs. I think technically lower quality paper will find a bid from this. That being said, [it’s] all dependent on the economic outlook and geopolitical landscape,” a sellside source said.

Another sellside source commented on the use of direct lenders in the loan market in 2019 and the expectation for that to continue in 2020.

“Direct lenders will keep taking market share, but they will all eventually blow up if there is ever a downturn,” the sellside source added.

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