Page 6 - MTIA Summer 2022 Market Brief

Deal Structures and Trends
The term “hybrid financing”
is used in many contexts.
We use “hybrid” to refer
to any transaction that
includes multiple asset class
structures in a single holistic
transaction. Combinations
can consist of various types
of loan (bank, syndicate,
and private lender) and/or
debt (loan-and note-based,
including bonds and
structured products).
1 “Global leveraged loan markets spring to life,” White & Case, 22 May 2024.
High inflation, rising interest rates, and recession fears reshaped the market’s
appetite for new loans, even as the inflationary vortex of the first half of 2023
dissipated. There have been several impacts on deal structures, including
amendments, add-ons, and a proliferation of hybrid deals.
New Loans Stalling While Amendments Abound
U.S. leveraged loan issuance in 2023 declined by 17.3% versus 2022 to $876.9
billion. In Western and Southern Europe, issuance declined by 10.2% to $174.1
billion. First quarter issuance for 2024 shows signs of a potential rebound,
reaching $365.3 billion and $76.4 billion respectively. Yet, even while loan markets
1
seemed calm from the point of view of issuance data, they remained highly active
as existing deals found new life to continue credit- driven activities from capital
to leveraged buyouts.
With uncertain conditions, borrowers and lenders often find it simpler to amend
and extend current loans than to refinance. Recently, as borrowers sought new
money, they added tranches more quickly and of greater size. This trend has
resulted in more than increases in deal size. It has also added complexity.
The benefit has been continued interest income for lenders with lower
repayment risk and without the need to restructure or manage default. Moreover,
as “maturity cliffs” begin to occur in 2024 and beyond, lenders will likely continue
to amend and extend or grant forbearance to preserve original investments and
avoid expensive restructurings or bankruptcies. The priority is maintaining stable
interest income.
Add-Ons for New Deals
Private equity sponsors play an essential role in the amendment phenomenon,
too. They increasingly add incremental facilities to current leveraged
loans to finance new acquisitions or provide additional financing. Sponsors also
utilize add-ons for “buy-and-build” roll-up strategies within existing borrowers.
This add-on activity stems partly from tighter lender approval of new issuances.
When loan committees are applying higher standards for unfamiliar assets and
borrowers, lenders can avoid extensive due diligence with incremental loans
instead of considering new companies.
Secondary Markets
Secondary markets have also been vibrant. The first years of the decade resulted
in a supply glut that pushed secondary market offerings to trade at noticeable
discounts, making them more attractive to some investors who see opportunities
to buy at a discount. Opportunistic investors may favor targets in poor shape
where they can gain influence over the borrower’s future. Finally, because there
is still a lot of money in the market looking for investible assets, some investment
managers are still keen to deploy capital even if they have paused fundraising.
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