Capital Markets Update Q3 – 2024

October 17, 2024

Matrix’s Capital Advisory Investment Banking Group
John J. Whalen, M. Ryan Weir, Jr., Garrett C. Novotny, CFA, CPA

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Market Overview

Overview

The leveraged loan market in Q3 2024 shifted its focus toward M&A and dividend recapitalizations, benefiting from improved rate visibility following the Federal Reserve’s initiation of an easing cycle with a 50-basis-point cut in mid-September. Gross loan volume declined from the previous quarter, but non-refinancing issuance jumped to its highest level in 2.5 years. While refinancing activity slowed, there was a continued drive in leveraged loan volumes, with private equity sponsors aggressively pursuing dividend recaps. Although loan spreads remained near multi-year lows, there was a modest widening in spreads for M&A deals. Private credit markets continued to evolve, competing for deals alongside syndicated loan markets, but private credit’s rapid growth appears to have slowed. Overall, the market showed resilience despite a recalibration in activity levels.

Market Activity

Issuance related to M&A, LBOs, and dividend recaps rose to its highest point since Q1 2022, with non-refinancing issuance increasing by 59% quarter-over-quarter. Refinancing-related activity, however, fell dramatically, down 69% from Q2, totaling just $29.8 billion, as M&A transactions took the spotlight. Borrowers continued to preemptively refinance in the wake of the anticipated 2028 maturity wall, contributing to one of the busiest years on record for repricing and refinancing amendments. At the same time, sponsor-backed companies extracted a record $26 billion through dividend recapitalizations so far in 2024, underscoring heightened activity in the private equity space.

Borrowing Costs and Investor Demand

Borrowing costs remained low, with loan spreads hovering near multi-year lows, driven by a persistent imbalance between supply and demand. Non-investment grade companies took advantage of these conditions, cutting borrowing spreads and extending maturities. The spread on new institutional loans widened slightly in Q3, particularly for M&A-related deals, yet spreads remain considerably tighter than their 2022 peaks. Investor demand continued to outpace loan supply, supporting favorable credit terms for borrowers. The overall spread for B-minus loans, though higher than in Q2, was still about 1.5 points tighter than in 2022, reflecting strong market competition for high-yielding assets.

Private Credit Lenders

Private credit continues to play a pivotal role in the financing landscape, though its blistering pace has moderated. Direct lenders remain aggressive in competing with the institutional term loan market, offering more flexible terms without the scrutiny of ratings agencies. However, private credit spreads have tightened, and fundraising has slowed over the past few quarters. The ongoing competition between private credit and syndicated loan markets has benefited borrowers, who continue to see wider credit tolerances and borrower-friendly terms. Notably, private credit lenders are increasingly forming partnerships with traditional commercial banks, opening new channels for deal flow. Still, private credit lenders are mindful of protecting their market share, often stepping in to refinance loans that would otherwise migrate to the broadly syndicated loan space.

Mergers & Acquisitions and Dividend Recaps

M&A activity picked up in Q3 as clarity on interest rates helped boost buyout and acquisition-related deals. Issuance linked to LBOs and M&A hit the highest levels in over two years, with $80.6 billion of non-refinancing issuance driving net supply in the loan market. Dividend recapitalizations reached a new high, with private equity sponsors extracting more than $26 billion year-to-date, nearing full-year 2021 levels. Belron’s $4.69 billion dividend recap was a standout transaction, marking the largest deal of its kind on record. Despite this surge, the broader M&A market remains cautious, with the challenging exit environment and high nominal interest rates dampening volumes slightly below historical averages. Nevertheless, M&A and dividend-related activity is expected to remain robust into 2025.

Market Outlook

The traditional bank loan market is gradually recovering but remains fragile. The Fed’s easing cycle is providing welcome relief to borrowers, and demand for loans continues to outstrip supply, keeping borrowing costs low relative to historical levels. However, risks remain. The drop-in refinancing activity in Q3 highlights the ongoing uncertainty around future rate movements and economic conditions. Private credit will continue to play a significant role, but its growth may stabilize as market dynamics shift. For the remainder of 2024 and into 2025, we expect M&A and dividend recapitalizations to drive market activity, but caution is warranted. Borrowers should continue to monitor evolving conditions closely and be prepared for possible volatility.

Broadly Syndicated Loans

Market Update – Overarching Themes

US Leveraged Loan Volume

Softer Quarter – For the first the time in almost two years, refinancings took a back seat to buyouts
Overall, primary market activity totaled $223 billion in Q3, roughly half of the record-breaking $405 billion in the second quarter. While it has been the slowest quarter so far this year, it still exceeded all quarterly tallies from Q2 2021 through Q4 2023.

Some $80.6 billion, or 36% of the quarter’s total, came from issuance unrelated to a refinancing – a proxy for net supply – an encouraging increase from roughly $55 billion/15% quarterly averages in the first half of 2024. In absolute terms, this was the highest amount since the first quarter of 2022 and is up 59% from the second quarter.

Repricing/amend and extend remain a theme but off historic Q2 volume
Meanwhile, refinancing-related issuance dipped by 69% last quarter from Q2, to just $29.8 billion, the lowest reading since Q4 2022, following two quarters of gangbuster activity. The second quarter and first quarter this year marked the highest and third highest totals on record, at $94.8 billion and $82.5 billion, respectively.

Similarly, repricing amendments tapered off last quarter, virtually disappearing for a spell in August, with focus shifting to M&A. Speculative-grade companies lowered the borrowing spread on $101 billion of term loans last quarter, down from record-breaking $224 billion in Q2 and $155 billion in Q1. However, putting the latest activity into perspective, it has still been one of the busiest quarters for repricings in the last five years.

Indeed, repricing amendments are still running at record pace for the year overall, at $479 billion. Including a small sample of re-syndicated repricings, borrowers have lowered the spread on $511 billion of institutional term loans this year, or a 38% share of all outstanding loans. The average spread cut has been 53 bps, translating into $2.7 billion of annual interest savings for these borrowers.

Source: PitchBook | LCD • Data through September 30, 2024 *Reflects repricings and extensions done via an amendment process only

Refinancing-related issuance has also maintained its record pace, despite the third quarter slowdown, totaling $207 billion this year. That’s roughly twice the 2023 pace and 37% ahead of this point in 2021 when borrowing spreads hovered around record lows.

Total measurable demand for loans is still running at hotter than average levels in 2022 and 2023 – the year-to-date total of $145 billion is significantly ahead of comparable periods in those two years. At the same time, cumulative net supply over the last nine months, as tracked by the net change in outstandings in the Morningstar LSTA US Leveraged Loan Index, remains non-existent.

Source: PitchBook | LCD • Data through September 30, 2024

Borrower Risk Ratings/Investor Demand

The key driver behind the drop in issuance for the B-minus cohort was lenders’ shift toward higher-yielding M&A transactions at the expense of refinancings. Indeed, B-minus borrowers raised $9.8 billion to finance buyouts in the third quarter, the highest level in two years, exceeding the cumulative total for the first half of 2024. LCD tracked seven buyouts for companies rated B-minus by at least one ratings agency, versus five in the entire first half. The supply of these higher yielding new transactions had been extremely limited, as most ended up with direct lenders.

Source: PitchBook | LCD • Data through September 30, 2024

Pricing Trends / Dividend Recap Activity

The technical imbalance is keeping new-issue spreads near multiyear lows regardless of credit quality, although clearing levels widened slightly in the third quarter thanks to a higher concentration of M&A deals. The average spread of term loans issued to B-minus companies widened by nine basis points, to S+424, but is now roughly half a point tighter than a year ago and more than 1.5 points tighter than the 2022 peak. For reference, the tightest spread for these loans in the post-GFC era was recorded more than 10 years ago, at L+397 in Q1 2014.

B-flat names cleared at roughly S+375 and B-plus names around S+340. Both cohorts remain more than a point tighter than 2022 levels and largely in line with 2021 averages.

The wide-open leveraged loan market in September spurred new-issue supply backing a record amount of dividend recapitalizations. September volume was $19.2 billion, including $17.5 billion from sponsor-backed companies. That’s by far the most for any single month in the US loan market – the prior high was $13.4 billion in July 2021 (both for total and sponsored deals).

Overall, sponsors have extracted $26.4 billion via dividends financed in the BSL market in the year to date, nearing the $26.7 billion for the comparable period in 2021, and already exceeding full-year readings for all years since 2019, except 2021.

Source: PitchBook | LCD • Data through September 30, 2024

Non-Refinancing Volume & Pricing Trends

Private equity sponsors raised $20.6 billion in the broadly syndicated market to finance LBOs, the highest reading in two-and-a-half years. That’s roughly twice the average levels since the rate-hiking cycle began and ahead of the pandemic-induced slowdown of 2020.

Although the market still has a long way to go to reach peak levels of 2021 or 2018, it has topped the long-term quarterly average – $19.9 billion between 2011 and 2021. Other types of M&A activity are also on the rise, with $24.7 billion of loan volume in Q3 supporting sponsored add-ons and corporate transactions. As with LBO issuance, it was the highest mark since Q1 2022, if slightly below the long-term quarterly average ($25.7 billion in the 11 years through 2021).

Spreads widened slightly in the third quarter due to a higher proportion of lower-rated borrowers in the sample. However, with more demand than supply for these deals, clearing levels remain close to post-GFC lows. Looking at all transactions, including sponsored and non-sponsored borrowers, the average new-issue spread was S+358 last quarter, just seven basis points higher than the S+351 recorded in the second quarter, which was the lowest reading since 2007.

At the same time, the average for just PE-backed M&A deals narrowed slightly in Q3, to S+390, the tightest level in 6.5 years. Looking at just buyouts, new-issue deals cleared at S+383 in the quarter, up from 364 bps in Q2 thanks to an uptick in B-minus transactions. That second-quarter reading was the tightest level post-GFC, although it’s based on a very small sample of better-rated names.

Source: PitchBook | LCD • Data through September 30, 2024

Leverage Statistics

Average debt multiples of large corporate LBOs increased from 4.54x at year-end 2023 to ~4.7x for the preceding nine months.

Equity contributions remained relatively static in the current period at roughly 50%.

Source: PitchBook | LCD • Data through September 30, 2024

EBITDA Adjustments and Synergies

Adjustments as a percentage of EBITDA have been steadily decreasing on an aggregate basis over the course of the past few years.

In 2023, adjustments as a percentage of EBITDA continued to remain in check, hovering near its lowest level since 2009 amidst the Great Financial Crisis.

The average synergies/EBITDA ratio decreased from 11.8% in 2019 to 6.02% in YTD3Q24. Underwriters remain wary of synergistic adjustments to EBITDA.

Source: PitchBook | LCD • Data through September 30, 2024

High Yield Bonds

September sported the highest monthly issuance since September 2021, exceeding the prior intra-year high of $32 billion in May, when bond prices recovered from an April swoon. The average bid for LCD’s flow-name bond sample rallied more than 5.5 points from April to September, clearing the runway for activity. All three of the highest quarterly volume tallies since 2021 have come this year.

Recently, Bank of America raised its full-year high-yield bond issuance forecast to roughly $300 billion, from $260 billion previously.

New senior unsecured issues cleared the high-yield primary at an average yield of 8.32% in the third quarter, down ~22 bps from the average in the second quarter, and versus a post-pandemic peak at 10.44% in the final quarter of 2022.

Source: PitchBook | LCD • Data through September 30, 2024

Private Credit

Private-credit-financed buyouts outnumbered BSL-financed deals 3.5 to one – one of the lowest ratios since the Fed began the last rate hiking cycle. The seemingly endless one-directional move that dominated in 2023, with deals migrating from the broadly syndicated loan market into private credit, stopped in its tracks in the first quarter of 2024.

An analysis of new-issue spreads of private credit loans to private equity-backed transactions shows that 41% of deals in the last six months have been in the S+500-549 bps range, LCD data shows. The prevalence of S+600 loans – once common in the private credit market – has diminished. Of course, there are outliers on both ends of the spectrum.

Borrowers have benefited and are responding accordingly to the advent of more accommodative market conditions. For instance, refinancing transactions have surged – by far, the dominant trend in private credit in 2024 has been refinancing. Refinancing deals in 2024 have exceeded all of 2023, at 158 versus 118 transactions, respectively, according to deals tracked by LCD.

Source: PitchBook | LCD • Data through September 30, 2024

Private credit investors, looking ahead to 2024, can expect a resurgence of deal activity, steady-to-tighter spreads, and a renewed focus on private debt recovery levels as defaults rise.

Private equity sponsors have significant dry powder ready to deploy and are yearning for more exit opportunities after a challenging year.

The expectation among sponsors is that new deal volume should pick up in 2024 alongside pent-up M&A opportunities.

Private equity sponsors routinely use dual-tracking loans in private credit and the syndicated market to see where the best terms and pricing are available, with many credit platforms offering both options. Even as banks are keen to showcase the comeback of the syndicated loan market, direct lenders continue to lock up $1 billion+ deals at a steady clip.

1. Source: PitchBook • Data through December 31, 2023
2. Source: PitchBook | LCD • Data through September 30, 2024

Glossary of Terms/Methodology

Dataset covered:

Unless noted otherwise, all the data included in this report reflects the U.S. broadly syndicated leveraged loans market, as tracked by PitchBook LCD. The dataset includes all leveraged loans syndicated in the U.S., including USD-denominated tranches of borrowers domiciled in Europe and other locations.

Secondary market analysis, i.e. “Outstanding Institutional Market Statistics” section is based on the Morningstar LSTA US Leveraged Loan Index.

Definitions and calculations methodologies:

Average Calculations: Unless noted otherwise, all averages are straight averages (not weighted by size).

Broadly Syndicated Loans: A broadly syndicated loan (BSL) is a large loan, typically exceeding $100 million, extended to a borrower by a group of lenders. These loans are arranged by one or several banks, known as arrangers, which then sell portions of the loan to a syndicate of banks, institutional investors, and other financial entities. BSLs are usually senior secured loans with floating interest rates tied to a benchmark like SOFR and may include covenants to protect lenders. Institutional term loans (Term Loan Bs), a subset of the broadly syndicated market, generally do not have financial maintenance covenants. BSLs tend to be rated by one of the major credit ratings agencies (S&P, Moody’s, or Fitch). They can also be traded in a secondary market for liquidity.

Covenant-lite: Loans that have bond-like financial incurrence covenants rather than the traditional maintenance covenants.

EBITDA: Reflects pro forma adjusted EBITDA, as provided in the Offering Memorandum during the loan syndication process.

High Yield: High yield bonds, also known as junk bonds, are bonds that offer higher interest rates due to their lower credit ratings compared to investment-grade bonds. These bonds are issued by companies or entities with higher risk of default. The higher yield compensates investors for the increased risk. High yield bonds are commonly used by companies to raise capital for growth, acquisitions, or refinancing. They can be traded in secondary markets, providing liquidity to investors.

Institutional Debt/Institutional Facilities: Tranches sold primarily to institutional investors, i.e. loan investors who are primarily funded by pooled funds. The funds can take the form of structured vehicles (CLOs), mutual funds, hedge funds, and pension funds. Institutional loan tranches traditionally have a bullet repayment with little (1% per annum) or no amortization, a longer maturity than a revolver or amortizing term loan and a spread of over 200 bps over a base rate. They are frequently subject to a pricing grid and sometimes carry call premiums/prepayment fees.

Interest Coverage Ratio: EBITDA to interest ratio at closing of each loan, based on pro forma adjusted EBITDA provided in the Offering Memorandum during the loan syndication process.

LBO: Acquisition of the majority share of a company by a private equity sponsor. Excludes recapitalizations, refinancings, and follow-on acquisitions.

Leverage Ratio: Debt to EBITDA ratio at closing of each loan, based on pro forma adjusted EBITDA provided in the Offering Memorandum during the loan syndication process.

Private Credit: Private credit refers to non-bank lending provided by private institutions, such as private equity firms, asset managers, and hedge funds, to companies. It serves issuers that may not have access to traditional bank loans or public debt markets, as well as those seeking financing for higher leveraged acquisitions or additional capital when traditional banks are more cautious. Private credit includes direct loans, mezzanine financing, and distressed debt, offering flexible terms and higher yields to compensate for the increased risk. Private credit loans tend not to be rated by the major credit ratings agencies and for most issuers are provided by a single lender vs. syndicate.

Pro-Rata Debt/Pro-Rata Facilities: Includes revolving credit and amortizing term loans, which are packaged together and usually syndicated to banks.

Recapitalization: A leveraged loan backing a recapitalization results in changes in the composition of an entity’s balance sheet mix between debt and equity either by 1) issuing debt to pay a dividend or repurchase stock, or 2) selling new equity, in some cases to repay debt.

Spread: Premium above a base rate; data reflects contractual spread at issuance of each loan.

Volume: The amount of loans launched into syndication during the specified time period. The date used for calculation is the bank meeting or lender call date of the transaction. In case of add-on loans, only the incremental amount is included. Extensions (A-to-E) or repricings done via an amendment process are not included in volume calculations.

Yield-to-maturity: The primary yield adjusted for the break price over the stated term of the facility.

Disclaimer

The contents of this publication are presented for informational purposes only by Matrix Capital Markets Group, Inc. and MCMG Capital Advisors, Inc. (“Matrix”), and nothing contained herein is an offer to sell or a solicitation to purchase any of the securities discussed. While Matrix believes the information presented in this publication is accurate, this publication is provided “AS IS” and without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranty of merchantability, fitness for a particular purpose, or non‐infringement. Matrix assumes no responsibility for errors or omissions in this presentation or other documents which may be contained in, referenced, or linked to this publication. Any recipient of this publication is expressly responsible to seek out its own professional advice with respect to the information contained herein.