Outlook 2014: Loan volume may be more driven by LBO/M&A activity

By Sara Rosenberg

New York, Dec. 31 - With so many refinancings and repricings completed in 2013, sources are expecting that supply on that front could taper off a bit in 2014; however, they are estimating that leveraged buyout and acquisition related financings could be on the rise.

"It's hard to predict record volumes for three years running, so we might see some stabilization. M&A/LBO activity could remain strong and refinancings could lessen given the big run toward the end of this year. I have total issuance at $900 to 950 billion. I could see that staying around the same next year," a sellside source said.

"I believe [repricings/refinancing] will remain a trend as markets remain strong, but at some point the well of available issuers is going to dry up," the sellside source continued.

"Refis dominated 2013 - record issuance in Q1 and the market size barely moved. The proportion of refis in 2014 will reflect supply and demand, which is yet to be seen. If borrowers can save 50 bps they will refi," a buyside source said.

"LBOs have been lower than expected for several years maybe due to slow economic growth, so if growth actually picks up next year, maybe we'll get more LBOs. Certainly the investor community would welcome fresh paper rather than spinning the rat wheel on refis all year," the buyside source added.

"Meanwhile, we may hear more about how the Leveraged Lending Guidelines will change the loan market. That is a TBD possibility and may be worth more column inches than angst; the market will adapt," the buyside source remarked.

Another source remarked that he expects refinancings to be down in 2014 versus 2013 since most have already been done, but that M&A/MBO/LBO activity will likely pick up.

He went on to say that there could be more repricings than refinancings in 2014 as "companies continue to perform well."

A market participant agreed, remarking that refinancing activity will lessen since so much of it has already been addressed and M&A/LBO activity will be up "on the improving economic outlook."

However, he thinks that when comparing expected refinancing to repricing volume in 2014, regular refinancings will win out and the repricing wave will slow.

The market participant put 2013 institutional loan issuance at about $480 billion, excluding repricings, and estimates that 2014 institutional loan issuance will be about $360 billion.

Second-liens in demand

Second-lien loans are anticipated to remain part of the landscape in 2014 as issuers may find the debt more attractive than high-yield bonds and investors appreciate the yield, sources explained.

One guy said that second-lien issuance will increase in 2014 as the debt is "the new mezzanine, and desire for yield opens up more demand for second-lien [paper]."

In agreement was the buyside source, saying: "More second-liens because people want yield, and second-liens can be cheaper for issuers than high-yield bonds in smaller capital structures. High yield seems to have plenty of ability to issue paper regardless."

The sellside source said that as long as covenant-light transactions are achievable, second-lien loans are expected to remain popular.

The market participant remarked that second-lien volume will rise as the debt is "becoming more accepted by the market and more investors [are] willing to buy it."

Covenant-light to remain?

Covenant-light was a large part of deal structures in 2013, and some think that will continue into 2014; however, there are others that believe a minimal amount of aversion toward those deals may make its way into the market.

"Cov-light will be offered on any decent deal as it was in 2013. Having a maintenance financial covenant is now a sign of a weak deal, in most cases. It's literally adverse selection. Those putting in cov-light maximums in CLO guidelines have no clue what they are asking for," the buyside source said.

The market participant remarked that he believes covenant-light transactions will see an increase in 2014.

The sellside source said that "cov-light has gotten a bit extreme, and we have seen pushback in the middle-market expense, but I don't expect a full-scale reversal. Leverage covenants seem to be the biggest necessity in covenant-loose structures."

"The recent OCC and Fed briefs mailed to large banks about holding covenant-light loans are the biggest wild card for 2014 as no one knows how that will shake out," another source 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.