Outlook 2024: Primary leveraged loan issuance focus may be refinancings, extensions

By Sara Rosenberg

New York, Dec. 29 – Primary leveraged loan issuance is expected by some to increase in 2024 when compared to 2023, with refinancing/amendment and extension transactions being one of the main focuses as a lot of issuers are facing upcoming maturities.

“A lot [depends] on whether there is a recession in 2024. If not, if the world is OK, then issuance should be up because the market is starved for new issues after two years of recession fears and rising rates. Refis should also rise as the maturity calendar gets closer and some higher-coupon paper issued under fearful conditions can be normalized,” a buyside source said.

However, if there is a recession, then the primary market and refinancings “will be down,” the buyside source continued.

“Companies tend to refinance their debt [about] 1.5 years before maturity, which suggests that they will focus next year on their 2025/2026 maturities. The amend-and-extend activity should remain robust (after a record year in 2023). However, some factors could limit such activity next year, such as (1) the growing number of CLOs failing their Weighted Average Life tests resulting in some A&E restrictions and (2) the greater investor scrutiny on A&E rules,” according to a BNP Paribas research report.

A sellside source expects issuance to be up 25% in 2024 when compared to 2023, with refinancings being about the same, “slightly more” repricings coming to market, leveraged buyout and merger and acquisition transactions “slightly up” on a year-over-year basis, and dividend deals increasing.

“Think there will be a lot of dividend deals as sponsors look to return capital to LPs and the M&A valuations remain depressed,” the sellside source explained.

Issuance forecasts

The sellside source put 2023 institutional issuance at about $230 billion, and anticipates issuance in 2024 to be around $275 billion to $300 billion.

A BofA Global Research report expects issuance to increase 8% to $240 billion in 2024, assuming that 2023 ends the year with about $220 billion in issuance.

“We think most of the supply increase will once again be driven by refinancings which are projected to increase by 12% [year over year]. Sponsors driven LBO activity comes at +10% while corporate M&A could increase by the least: 6%,” the report said.

The BofA report explained that although refinancings jumped 120% in 2023, maturity walls are marginally worse in 2024, which is why the expectation is for increased opportunistic refinancing activity in 2024.

“Given cost of debt, the economics continue to remain unfavorable for most leveraged buyouts. However, faced with the need to generate returns and return capital, we think sponsors will be incentivized to make deals work even if that comes at the cost of providing more equity capital and lower expected returns. On balance, we are penciling in a +10% bounce in sponsor activity next year,” the BofA report said.

“Given the high cost of debt, corporates will be discouraged to borrow for any organic or inorganic growth, and even equity transactions might be challenged in a world of high volatility and geopolitical risk. In addition, an election year always creates additional hesitation for corporates to spend without knowing the political outcome. Having said that, these are similar dynamics as already witnessed in 2023, prompting M&A volumes to decline by 50% [year over year]. We think these lows are hard to replicate and expect a small bounce back of 6% [in 2024],” the BofA report continued.

“On balance, we project loan technicals to soften marginally, though still remain quite supportive in 2024. The marginal increase in supply will be more than offset by higher repayments, resulting in more negative net supply. However, we expect demand to soften comparatively more. Coupons are expected to decrease with rate cuts, and retail will continue to shrink. Simultaneously CLOs, that are already running at -30% [year over year] will not provide any incremental buying power.

“Putting this together, demand net supply is projected to decline 10% next year, albeit from record highs. We think technicals will deteriorate more towards the back half of the year as [high-yield] bond issuance and sponsor activity increase,” the BofA report added.

Second-liens

The amount of second-liens issued may also be determined by the state of the economic backdrop, and it is possible that a majority of second-lien debt issued will be privately placed, according to sources.

“Second-liens generally need LBOs and LBOs need a positive backdrop,” so the amount of second-lien issuance will depend on whether there is a recession, the buyside source remarked.

The sellside source said second-lien issuance will be “limited unless base rates decline.”

“Hard to syndicate [second-liens] when they require bespoke terms [so] 90%+ will be privately placed,” the sellside source added.

Private finance trend

One notable trend in 2023 was the use by borrowers of private credit, and this trend is likely to continue in 2024.

The sellside source noted that some large broadly syndicated deals, like Finastra and Hyland, were taken out of the syndicated market and refinanced in the private credit market.

Finastra was one of the largest ever private credit deals in the United States and included a $4.82 billion senior secured unitranche term loan facility and a $500 million senior secured multicurrency revolving credit facility to refinance its existing credit facilities.

Hyland Software completed a $3.4 billion unitranche facility with Golub Capital as administrative agent that was used to refinance its existing broadly syndicated debt. The unitranche facility included a $3.25 billion term loan and a $150 million multicurrency revolver.

“Banks are still operating in a constrained environment with reduced capacity to underwrite new deals. Regulatory risk has curbed willingness to arrange highly leveraged profitable deals, while market volatility has reduced appetite to fund transactions with uncertain timelines. We think marquee deals can and will be done, but fringe issuers may have to turn to nonbanks/private debt to find financing solutions,” the BofA report said.

“Nonbanks have the advantage of deep pockets, flexible financing solutions and timelines, as well as lower cost of financing. Most large platforms now also arrange the deals and have their own pipelines of deals, sponsored or otherwise. These advantages have made it possible for them to continue to take market share away from traditional banking system. This is a secular trend which we see continuing in the future,” the BofA report added.

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