Outlook 2013: Leveraged loan volume to stay high as CLOs add demand

By Sara Rosenberg

New York, Dec. 31 - Leveraged loan volume is expected to remain strong in 2013 as CLO issuance will provide for increased demand, and some are hoping that the year will bring more leveraged buyout and merger and acquisition financing and less refinancing/dividend transactions.

One source said that volumes in 2013 may be relatively flat to 2012 numbers, as refinancings abate due to fewer upcoming maturities and as leveraged buyouts increase.

"Low growth and benign interest rate environment expected to continue. Uptick in CLO issuance should help drive demand for institutional leveraged loan volume," the source added.

A buyside source, meanwhile, remarked that 2012 was dominated by dividends and refinancings. "I would hope fewer next year but if that's the opportunity set then issuers will tap it," he said.

"It feels like the whole market refinanced in 2012, so I hope we don't repeat that in 2013 but instead get more M&A and LBO's rather than dividend deals. Much will depend on the economic resolution of the fiscal cliff and, always, Europe. If those work out, then I should get my wish. If not, then the primary could dry up," the buyside source explained.

"Need 50 basis points of tightening to reprice. I hope we don't get that much. Feels like everybody repriced and dividended in the last few months so the pace has to slow because the same cap structures won't be back for dividends so fast and probably won't reprice again so quickly. If every generic $100 million EBITDA company comes to the market for a dividend in 2013 it's going to be a depressing year," the buyside source added.

A sellside source explained that he thinks volume will stay strong in the early part of 2013 but that it will be tough for total volume to match 2012.

"I expect spreads to continue to tighten with the CLO engine going so strong, so that will create greater opportunity for refinancing. M&A had an average year so I think will be more active in 2013. Still a lot of sponsor money out there that needs to be put to work or returned to investors, so they will put it to work. Deal size may creep up a little larger as well," the sellside source remarked.

A market professional put issuance in 2012 at around $300 billion and predicted that the number may creep down to $250 billion in 2013.

"Market outperformed in 2012. Year-over-year comp will be too difficult to match. M&A and refi [will be down]," he added.

A second sellside source agreed, saying that he expects issuance to be flat to slightly down. "This year should end up roughly at $310 billion; think we would do well to match that. Refi as a percentage of [the] market should stay the same, but in money terms, think it will be a challenge to match this year's activity. M&A should be up, if for no other reason than that's the only direction to go from here."

"There are some sizable deals in the pipeline for 1Q, though, so we should start off on a good foot at least," he explained.

Amends/extends could diminish

"If you have not amended and extended at this point, can you? Well held deals can refi cheaper with an amend and extend, but generally I think that wave has crested unless spreads move a lot tighter," the buyside source said.

"I don't have a strong opinion either way. Mid-to-high four-B credits may do amend to extend to minimize fees and keep things simple but lower rated entities may opt for regular way since loan structures are pretty favorable right now," the sellside source remarked.

"Less A&E. Regular refi is more attractive in this rate environment," the market professional explained.

"As long as CLO's continue to be a dominant presence in the market and as long as there are stub portions of the 2007 jumbo LBOs outstanding, you will continue to see A-to-E's. In times where the market is strained for new issue, which we will likely see at times next year, it allows issuers to arbitrage new issue rates and fees," the second sellside source added.

Second-liens in demand

Second-lien loans were seen in quite a few deals over the past year, and sources are anticipating that the market will continue to grow in 2013.

The buyside source explained that he felt like there were a lot of second-lien loans issued in 2012 but that number will likely get even higher in 2013 "because the credit cycle is favorable and the need for yield is unending."

"Investors seem to have interest now given such tight spreads in the bond market," the sellside source said about second-lien loans. "Feels like there are more buyers than there are loans. Spreads seem to be better than in the bond market and you pick up a second-lien versus unsecured."

The market professional said that he anticipates second-lien issuance in 2013 to be similar to 2012 as the structure "has become an accepted part of the market."

The second sellside source anticipates an increase in second-lien loans "as issuers push the bounds on overall leverage and investors need to find more yield to anchor the wide end of their portfolios."

2012 trends

As for notable trends for the 2012 year, sources named a few, including precapitalization deals, dividend transactions and a boom in CLO's.

"A very bad trend just emerging is portable capital structures (precapitalizations), where credit agreements do not require repayment on sale of the company. This is something the buyside should resist, just as bondholders have done well insisting on change-of-control puts," the buyside source remarked, adding that he had to drop out of a deal in 2012 because of that structure.

The buyside source also found dividend deals to be a huge trend in 2012. "I expect tax law changes will reduce that trend in 2013, but not eliminate it as cheap funding makes dividends hard to resist," he remarked.

Meanwhile, the sellside source pointed to CLO's as the most interesting trend of the year.

"Big move in 2012. The last three months have been very strong. Bodes well for 2013. I think every money manager will try to do 2 CLO's each year," he added.

The second sellside source, meanwhile, looked ahead to 2013 and said that he expects trends to be enhanced flexibility for accordions, more modified change of controls to allow structures to travel and loan-to-bond exchanges for stressed capital structures.

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