Private Equity Lending League Table 2018 Annual Report
Leverage Loan Market 2018 Overview
Summary
Leveraged institutional activity declined 21% over the prior year. At US$730bn, institutional issuance remained elevated this year but was 21% off 2017’s record level. Annual returns for leveraged loans were driven down by a declining secondary and ended 2018 at 0.44%, according to the SP/LSTA LLI.
Primary Market:
Leveraged institutional activity declined 21% over the prior year, but that was partially offset by a 6% increase in leveraged pro-rata lending to US$514bn, surpassing the previous high of US$510bn in 2013. The institutional share of leveraged volume declined to 59%, from 66% in 2017, while the pro-rata share increased to 41%.
At US$730bn, institutional issuance remained elevated this year but was 21% off 2017’s record level. Corporate high-yield bonds recorded their lowest issuance total since 2009, down 40% to US$168bn. Over the last two years, loans have outpaced HY bond issuance by the largest margins on record, reflecting investor demand for floating rate assets.
The dynamics behind institutional loan issuance shifted in 2018 with the share of new money increasing to 47% of total volume. While institutional refinancings declined 37% YoY, new money increased by 12% to US$341bn, headlined by several jumbo LBO transactions that closed in the second half of the year.
Average debt to Ebitda levels declined to 6.4x for broadly-syndicated LBO transactions and 5.4x for institutional middle-market LBOs in the fourth quarter. Amidst volatility in 4Q18, the average first-lien spread per unit leverage increased to 92bp, the highest quarterly level since 1Q17’s 98bp.
December experienced one default with broadcaster Checkout Holding filing for Ch 11 protection, taking annual defaulted par volume to US$21.7bn, compared to US$26bn in 2017. The TTM default rate ticked lower to 1.75%, it was 2.4% a year ago. The defaulted par volume would have been lower if not for the March filing of iHeartCommunications which added US$6.3bn of defaulted loans.
Secondary Market:
Annual returns for leveraged loans were driven down by a declining secondary and ended 2018 at 0.44%, according to the SP/LSTA LLI. Returns declined from the 4.12% posted in 2017. Open-ended loan funds posted a negative return of 0.11% in 2018. Across risk asset classes, leveraged loans were the least worst performing sector losing 3.45% in the fourth quarter, compared to -4.7% for high-yield bonds while equities plummeted 14% in 4Q2018.
The average mark for liquid institutional loans plummeted by over 2 points in December, as ongoing broader market volatility took its toll on loans. Secondary levels were range-bound and saw little volatility until the final two months of the year with average bids ending the fourth quarter down 390bp to the 94.5 context.
The percentage of multi-quoted institutional loans priced at or above par plummeted to 1% by the end of the year. It stood at 66% at the beginning of the year.
After recording inflows through most of 2018, loans funds posted outflows in the last seven weeks of the year, ending the fourth quarter with US$17.4bn in outflows and ending the year with an outflow of US$1.4bn. High-yield bond fund outflows accelerated to US$20bn in 4Q and ended the year at US$43.3bn, the largest annual outflow on record.
AUM ended the year down 5% YoY. Led by huge outflows funds and lower secondary market values, loan mutual fund & ETF assets under management (market value) declined to US$148bn in December.
Yields on U.S. high-yield bonds widened 69bp in December to finish the year at 7.95%. This was their highest levels all year and represent the widest since 2016.
CLO and Loan Funds:
2018 posted the highest CLO new issue volume in history at US$128.11bn, topping 2014’s record-setting year of US$123.6bn by US$4.55bn. Total 2018 middle market CLO activity was US$15.7bn, reflecting an expansion of the private credit markets.
There was US$2.72bn of CLO refi and reset activity in December, with US$1.12bn in resets, $1.6bn in refinancings and no reissues. Full-year 2018 repricing activity recorded US$83.8bn in resets, US$35.4bn in refinancings and US$31.2bn in reissues, a dramatic shift from 2017 when refinancings dominated repricing activity with US$102.6bn of volume, and US$61.6bn in reset activity.
Average AAA DMs were higher in December, as broader market volatility caused spreads to widen the most all year. Based on disclosed pricing, the average AAA DM ticked higher to 121bp in December, not including several deals with undisclosed higher pricing. New issue BSL AAA spreads have widened 14.6bp since the start of the year. In 2017, contrast to last year when spreads tightened from 145bp to 113bp during the course of the year.
In a distribution of CLO portfolio prices, less than 3% of U.S. CLOs have a WAB at or above par, with 94.8% showing a WAB between 93 and 96. Compare this with 3.2% of CLOs showing a WAB between 93 and 96 just one month ago.
Leveraged loans cross the trillion-dollar mark this year as the asset class grew 20% in 2018 to record levels, compared to 8% in 2017. Institutional loan outstandings ended December at US$1.147trn.
Annual returns for leveraged loans were driven down by a declining secondary and ended 2018 at 0.44%, according to the SP/LSTA LLI. Returns declined from the 4.12% posted in 2017. Open-ended loan funds posted a negative return of 0.11% in 2018.
