Outlook 2023: Primary leveraged loan issuance focus may be refinancings, dividends

By Sara Rosenberg

New York, Dec. 30 – Leveraged buyouts/M&A financing transactions are expected to remain lackluster in 2023, but some sources think refinancing and dividend deals may spark an overall increase to activity, while others expect total year-over-year volume to be lower than 2022.

A sellside source expects issuance in 2023 to be “up for sure” from 2022, with an increase in refinancing transactions and dividend deals. He expects M&A/leveraged buyout activity and repricings to be roughly flat on a year-over-year basis. In total, he estimates term loan B issuance to be around $350 billion in 2023 and puts term loans B issuance at around $217 billion in 2022.

“I think there is pent up demand for refis and dividends. [M&A/LBOs] probably the same since it will be a slow start to the year. LBO market was hot at start of last year and will be really cold at start of this one. Will take time for auctions to come back. Maybe LBOs are up year over year but will be all back half. [Repricings], there were almost none this year and expect roughly the same for next year, but maybe back half will be better,” the sellside source added.

Regarding second-lien term loans, the sellside source thinks volume will be “up a little,” but for the most part these types of loans will be “privately placed.”

“Broadly syndicated second-liens are a bull market product and we are not in that anymore,” the sellside source explained.

A BofA Global Research report, on the other hand, estimates that new money supply will decrease by 15% year over year to $175 billion in 2023, saying that most of the decline will likely come from LBOs dropping 35% and corporate M&As falling 15%, with refinancings increasing 30%, defying their usual trends in high-rate environments due to special circumstances in 2023.

“As challenged as this year has been for supply, we think next year will be even tougher. On the issuer front, rising cost of debt is likely to put a lid on refinancings and buyouts, while high volatility combined with deteriorating fundamentals is going to reduce companies’ urge to merge,” the BofA Global Research report said.

“Investors themselves are faced with rough technicals, most of them seeing outflows from vehicles dedicated to floating-rate investments. Finally, banks have their own problems with large volumes of hung deals that they have been forced to finance themselves reducing capacity to underwrite new deals. As such we think it will only be the most pressing situations which will lead to new deals being brought to the loan primary market next year.”

“Given cost of debt, the economics don’t add up for most leveraged buyouts. Faced with the need to generate returns and large amounts of capital to deploy, we are now hearing sponsors leading all-equity deals with hopes of selling down part of their equity at a more opportune time when the rate backdrop is more cooperative,” the BofA report said.

“Other possible types of sponsor activity without the need to borrow can be equity for equity deals, carve outs etc. The only traditional LBO type financings that may come to market next year are the ones pushed out from 2022 where the banks have either already committed or funded the deals. On balance, sponsor activity is poised to decline meaningfully next year.”

“Opportunistic activity usually gets crushed in high-rate backdrops because issuers choose not to tap markets. This is generally going to hold true next year except for a) there will be issuers that will have to be forced to face the primary given their upcoming 2024 maturities b) the underappreciated risk from the full lapse of Libor can cause some primary market volatility building up to the summer,” the BofA Global Research report continued.

The report went on to say that Libor cessation due to materialize in June 2023 may impact issuance numbers.

“Libor transition within the loan index has been slow with 84% the index still tied to the legacy rate. These loans will need some form of remediation next year,” the BofA Global Research report explained.

Since remediation options could include refinancing transactions, the BofA Global Research report refinancing forecast for 2023 may increase by two times.

As for demand, the BofA Global Research report expects that to be limited to CLO creation and private debt activity in 2023.

“Usually, retail inflows are highly correlated to rates, but such is not going to be the case next year. The flurry of inflows ($40 billion) that loan retail funds had accumulated in [first half 2022] are all but gone because of loans now being considered a source of credit risk rather than a shelter from rates. We expect more outflows next year.

“Private debt funds are likely to provide a meaningful source of support for the loan market next year. This leaves CLOs as the only major buyer of loans next year. We expect CLO activity to decline by [about] 20% next year,” the report added.

Private credit trend

There is some chatter that the private credit market may take some deals away from the broadly syndicated loan market in 2023, as was seen in 2022.

“I don’t have names, but yes, there has been discussion of private credit as impinging on the syndicated loan market as it grows from its roots in middle-market credit,” a buyside source said.

“Step back and think about it, and you will realize that private credit is just another form of levered credit availability. It can’t be the best solution for both lenders and borrowers because borrowers want the cheapest credit and lenders want the best returning credit.

“If the syndicated loan market is competing with private credit, the competition will be about interest rates and terms, like covenants. Sometimes private credit will be better for borrowers and sometimes syndicated loans will be better. Syndicated loans may have looser covenants and a more diverse group of holders. Private credit has concentrated holders, which will matter if there is a default, and try to get tighter covenants and higher pricing. Their ability to compete has to do with quick access to capital and at least reduced underwriting fees.

“In a year like 2022, with the primary mostly closed, private credit could offer available capital to get LBOs done. But if the CLO market was humming and with it came a primary calendar, private capital’s advantages might recede to some extent,” the buyside source continued.

“The world will offer leverage in many forms, including private credit and syndicated bank loans, for years to come. Which, if either, dominates will reflect funding terms, quick availability, and non-monetary terms,” the buyside source added.

The sellside source said that he expects to continue to see some large leveraged buyouts funded with private placement debt in 2023, as was the case in 2022 with names like Zendesk Inc. and Stamps.com going the private credit route for their buyout transactions.

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