Navigating the Loan Market Holding Pattern

The current economic climate has led to a slowdown in new syndicated loan issuances during the first half of 2023. To observers on the ground, it may look like a holding pattern. However, activity in the market remains relatively robust. In our role of providing Loan Market Solutions, we see high traffic, especially with existing credit facilities and CLOs. With an uncertain forecast for the immediate future of the loan market expected to persist, the capacity and operational expertise of agents and trustees remain essential to the stability of execution in the marketplace.

New Loans Stall While Amendments Abound

The current macroeconomic economic climate is complex, even if the inflationary vortex of the first half of 2023 has begun to dissipate. High inflation, rising interest rates, and recession fears have affected the market’s appetite for new loans. Volumes are down significantly, with new institutional loan issuance in the U.S. falling to $47.7 billion, almost 75% in Q2 2023 compared to their peak volume in 1Q 2021.¹ Second quarter new Euro institutional loan issuance fell to €4.1 billion, nearly 90% below the same peak quarter.² Meanwhile, the secondaries market has suggested significant acceleration, with some experts projecting as much as $70 billion of activity in the second half of 2023.³

Various loan market stakeholders experience these concerns differently.

However, amendment activity on existing loans has flourished. With uncertain conditions, borrowers and lenders often find it simpler to amend and extend current loans than to refinance when interest rates and credit risk factors have become more complex. The result is generating continued interest income for lenders with lower repayment risk and without the need to restructure or manage default. This trend emerged as the market softened in 2021, continuing into the present with default rates below historical lows.

Such arrangements can demand significant effort from all parties and supporting service providers. They require negotiating legal documents and terms and conditions that must be implemented operationally to reflect new provisions, such as changes to the debt structure, deal parties, payment arrangements, and notices. The effort to implement these provisions successfully often matches that of an entirely new loan issuance.

Sponsors Tap Add-Ons for New Deals

Private equity sponsors have also responded to pervasive credit concerns. 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. Finally, private equity funds have accumulated significant dry powder ready to deploy, but anecdotally, we hear that many perceive a lack of attractive investment opportunities. Here, too, rather than set up fresh credit lines, it makes sense for sponsors to provide incremental add-on financing as an easier route to free up capital for purchases.

This add-on activity has flourished partly due to tighter lender approval of new issuances. Loan committees are applying higher standards for unfamiliar assets and borrowers. Lenders can avoid extensive due diligence when supporting current portfolio companies with incremental loans instead of considering new companies.

However, these arrangements must still be operationalized, just as amend-and-extend agreements in syndicated loans. While loan markets look calm from the point of view of issuance data, they remain highly active as existing deals find new life to continue credit-driven activities from capital to leveraged buyouts.

Maturity Cliffs Face Low Refinancing Volume

The coming year will see enormous loan maturity volumes dubbed “maturity cliffs.” But with unsettled markets, we do not expect to see the same level of refinancing that we might in a healthier environment. Instead, lenders will likely amend and extend or grant forbearance to preserve the original investment and avoid an expensive restructuring or bankruptcy. The priority is maintaining stable interest income. With debt markets significantly slowed, there are few options otherwise.

Consequently, agents and trustees will continue seeing facilities added to portfolios, with few, if any, roll-offs. Their capacity and experience to handle complexity at high volume will remain crucial, especially as new lending eventually becomes more active. At the same time, many are investing in operational and technology improvements.

Operational Management and Market Navigation 

Although new issuance has not returned to levels seen historically, the workflow for agents and trustees administering leveraged loan portfolios has remained constant and, in some cases, has even increased.

Experience and responsiveness in smoothly handling amended deals, incremental facilities, and maturity extensions provide significant value to lenders and borrowers alike. Given ongoing market uncertainty, these operational capabilities will remain vital throughout the current credit cycle.

Conclusion: Careful Steering Needed

The leveraged loan market faces a prolonged period of complexity and uncertainty. Nevertheless, there are signs that inflation has cooled enough to stabilize interest rates in the medium term if not eventually to reverse them. For lenders and sponsors, loan agents and trustees' operational excellence and readiness will be essential in navigating through it and managing the eventual return to higher volumes as pent-up credit demand sees supply returning.

Wilmington Trust's Loan Agency team — located in the U.S. and Europe — has extensive experience administering performing and non-performing loans. Our financial and organizational stability, reputation, and strength of service allow us to act quickly, whether it is for restructuring, addons, or completely new financings.

For the experience you need to support transactions in the bank loan and securitization markets, contact a Wilmington Trust Loan Market Specialist today.