Outlook 2012: Leveraged loan issuance anticipated to retreat amid macro worries

By Sara Rosenberg

New York, Dec. 30 - Leveraged loans are expected by many to see a decline in volume in 2012 versus 2011, based on the assumption that there will continue to be issues in Europe and general concerns surrounding the economy.

"We expect the 2012 volume to decrease, as the economic situation - stalling growth in Europe, tension on bank funding - continues to put pressure on the market. The declining demand [seen in] the significant outflows from loan mutual funds [in the second half of the year] will have impact on issuance as it did in the second half of 2011," a market source said.

He put total volume in 2011 at around $370 billion, unequally distributed between roughly $260 billion in the first half of the year and $110 billion in the second half.

"If the current trend goes on for [first half] 2012, next year's volume could take a serious hit compared to 2011's with a decline of M&A/LBO's share," he continued.

Refinancings may decline

A buyside source pointed out that refinancing activity will likely be down in 2012 because there will be "fewer refis to do - [2012] and [2013] mostly cleared out and [2014s] that were easy have been done too. LBOs are a confidence issue. How confident will people be next year?

"Average deal size seemed small in 2011. Where were the mega deals? That might continue. [There was a] lack of LBO sponsor confidence and/or lack of financing for such confidence, both of which I expect to continue in 2012 unless Europe has a shockingly sunny resolution.

"Guessing issuance down but a lot depends on the economy and Europe. I won't posit a 2012 issuance number. It's simply too random based on macro unknowns," the buyside source added.

A market professional agreed that volume in 2012 will be "down due to less refinancings, similar event driven volume and continued noise out of Europe." He put 2011 institutional volume around $240 billion and expected 2012 institutional volume around $200 billion.

Amends/extends versus refis

Amendments and extensions were very popular for a time, but by the latter part of 2011, there were much fewer of these transactions around, and market players don't really expect much of a pick up in activity on this front.

"If Europe gets ugly and the market [dries] up, you'll see more amend/extend. Otherwise, [volume] should be about same as what we're seeing these days, which is not so much. The refi wall has been substantially reduced. Most deals can get refied if the story isn't too tough. If leverage is too high and you can't refi, [the borrower] may need to go the amend/extend route," a sellside source remarked.

"A&E to me reflects tough market conditions, and I don't expect that," the buyside source said.

The market professional reiterated this point, saying that there should be "more regular financings" in 2012, "assuming a gradual resolution of European sovereign issues."

"Amend to extend volume fell off a cliff in H2 2011 due to lack of demand for long term dated floating-rate legacy paper. We may see the market restart if the market conditions make the refinancing more difficult," the market source added.

Second-liens up or down?

The fate of second-lien loans in 2012 is a topic that sources couldn't quite agree on, as some theorized that the market may see more of this debt and others thought a decline in issuance could be coming.

The buyside source anticipates second-lien issuance to head higher in 2012, compared to 2011, explaining that the debt is "well liked and needed by mutual funds, and the coupon's attractive in a low default environment."

When asked if mezzanine debt may take the place of second-lien loans, the buyside source remarked that it "depends on the deal flow from PE sponsors that have mezz sleeves/relationships. [It is] impossible to say, but reasonable to conclude that a low-default environment encourages riskier issuance. Both second-lien and mezz qualify but second-lien going to average Joes and mezz going to players with less risk aversion."

The sellsides source, meanwhile, called mezzanine financing a popular alternative at this time. "Who knows how long it will stay hot, but business development corp.'s [such as] Prospect, Apollo, Ares are actively showing out balance sheet," he added.

The market source offered another point of view, saying that his firm's expectation is for "second-liens deal volume to decrease as the risk aversion increases in the market."

And, the market professional's opinion is that second-lien issuance will be pretty flat in terms of volume compared to 2011. The loan market is not strong enough for second-lien issuance to steal issuance from high-yield, he explained.

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