By Michelle Sierra
NEW YORK, April 1 (LPC) - After a robust start, first
quarter activity for US syndicated loans ground to a halt as the
world came to terms with COVID-19, a new and deadly disease that
spooked lenders and rattled markets. Deals were put on hold,
investor meetings canceled, and fundraising schedules postponed
as market participants faced a health crisis of unprecedented
reach and magnitude.
As the virus spread across continents, leveraged borrowers
put the brakes on the frantic refinancing activity that took
place early in the quarter, while investors reassessed their
appetite for risk. Healthcare companies such as Bausch Health
and Pharmaceutical Product Development (PPD), as well as British
technology firm Micro Focus pulled transactions as the
borrower-friendly market all but vanished.
Investors took shelter in metals and government bonds. Loan
funds saw US$11.6bn of outflows, according to Refinitiv Lipper.
After a slow first two months in the investment grade loan
market, better-rated companies such as General Motors, Ford
Motor Co, Anheuser-Busch InBev and Petrobras opted to hoard
liquidity as they borrowed from revolving credit lines that they
usually leave untapped.
Despite the panic in the latter part of the quarter,
institutional issuance still spiked 170.5% year-over-year, with
US$180.88bn of volume in the first three months of the year
versus US$66.87bn in the same period the year prior. Numbers
also went up 30.1% from quarter to quarter with just US$87.88bn
arranged in the last quarter of 2019.
Leveraged loan volume in the first quarter was US$245.36bn
compared to US$167.33bn in the same period the year prior, or a
46.6% increase. Leveraged loan volume was US$224.72bn in the
fourth quarter of 2019.
With the heightened global uncertainty as a backdrop, total
mergers and acquisitions (M&A) volume took a beating and
year-over-year numbers slumped 40.6%. There was US$87.77bn in
total M&A volume in the first quarter, versus US$147.74bn in the
same period of 2019. Investment grade M&A volume suffered the
largest drop, down 76.9%, or US$19.09bn versus US$82.65bn in the
same quarter last year. Leveraged volume was down 7% with
US$58.63bn in the first quarter of 2020.
As investors took a flight from risk, traditional middle
market deals led the 38.1% decline in issuance quarter to
quarter.
“Most of the deals are getting pushed because pricing has to
reset itself, and the market has to determine where yields
should be,” said then Ryan Kohan, a portfolio manager at Western
Asset Management.
DRAWDOWNS
As leveraged lending disappeared, investment grade lending
became the forefront of activity in the loan market.
Bankers started the quarter eager to deploy cash for M&A,
but uncertainty linked to the US presidential election and green
shoots of news of the outbreak curbed activity. Corporates in
discussion with lenders about transformational transactions held
off until the market impact from the virus was more fully
understood.
"Nobody knows the magnitude of the impact," a senior lender
at a US bank said. "Up until last week, a lot of refinancing
discussions were happening and corporates were thinking of going
to market before the US election. Now there's likely to be a
pause until there's a little more clarity about anything."
Investment grade volumes finished the quarter down 12.7%
year over year with US$189.36bn in the first three months of
2020 vis-à-vis US$216.87bn in the same period of 2019. Volumes
also continued to drop quarter-over-quarter from US$192.15bn in
the final three months of 2019.
New money issuance for investment grade borrowers took the
most significant hit with US$37.25bn of loans in the first
quarter compared to US$89.03bn in the same period of 2019, a 58%
drop. Despite the fall, it is an improvement from US$10.70bn in
the fourth quarter of 2019.
There were 91 deals in the first quarter, down from 101 in
the same period of 2019. It is a slight drop from the quarter
over quarter amount of 104 deals in October, November and
December of 2019.
According to JP Morgan, by March 27 there had been US$227bn
in revolver drawdowns, with 53% of announced borrowings done by
investment grade firms. More are expected to follow.
Daniela Guzman and Aaron Weinman provided additional
reporting.
(Reporting by Michelle Sierra. Editing by Kristen Haunss.)
