NEW YORK, Jan. 3 (LPC) — Trade wars, Brexit uncertainty and a possible looming recession have reduced U.S. syndicated loans to US$2.11 trillion, an abysmal 20% drop from the previous year’s record.
The slump extended through the year and into the fourth quarter, amounting to $518.7 billion, down from $659.8 billion in the same quarter of 2018, according to LPC, a unit of Refinitiv. .
Although capital is widely available from traditional and emerging lending sources, business confidence has plummeted and potential buyers have turned away from deals. As a result, M&A volume slowed, resulting in issuance of $465.2 billion, compared to $648.5 billion in 2018, a 28% decline.
A junior M&A volume of US$59.5 billion accumulated in the fourth quarter, compared to US$155.4 billion in the same period of 2018.
The decline was pronounced on the quality investment side of the market, where numbers were down nearly 18% from 2018 levels at $193.42 billion versus $234.78 billion. A drop in activity occurred despite at least two mammoth-sized financings that made bankers optimistic for large deals in the second half that ultimately failed to materialize.
Morgan Stanley and MUFG provided a $33.5 billion bridge loan in January 2019 to support drugmaker Bristol-Myers Squibb Co’s $74 billion purchase of biopharmaceutical company Celgene Corp. billion in 364-day bridge loans supporting US biopharmaceutical company AbbVie Inc’s $63 billion acquisition of Botox maker Allergan plc.
Investor appetite for leveraged loans waned when the Federal Reserve began cutting rates in 2019. As a result, investors pulled money out of loan funds in 2019 except for one week, according to Refinitiv. Lipper.
While the issuance of secured loan obligations (CLOs) was strong last year, the influx of liquidity seen in previous years disappeared from the US loan market. This additional supply – supported by a search for floating-rate assets when interest rates rose – had previously allowed companies to reduce interest payments.
As macro uncertainty made investors even more wary, leveraged volumes hit $807.85 billion last year, down from $1.24 billion in 2018, or a 35% drop went together with a lower number of transactions: 11,775 over the year with 440 in the fourth quarter.
A lower number of M&A deals also characterized leveraged lending in 2019 with $252.97 billion in M&A deals compared to $380.95 billion in 2018.
Although the stock has been focused on refinances, the number of refinances has also declined year over year, resulting in volume of US$1.45 trillion in 2019 compared to US$1.79 trillion in 2018.
While traditional mid-market volume fell to $26.83 billion from $30.45 billion in 2018, the year was characterized by private credit taking off.
Mid-market leveraged buyout trades increased from 112 to 128 in 2019.
“The theme for 2019 was private debt. Rise or take off – this was a slow build after the 2008 financial crisis…and really started to ramp up in 2014 and 2015, creating an opportunity for private debt markets to be more aggressive in facilitating issuers,” Grant Moyer, head of leverage, Capital Markets told reporters at a MUFG event in December.
Lenders and investors in syndicated loans expect the resolution of geopolitical events such as Brexit and the trade wars last year to lead to some business consolidation. They will remain vigilant in the new year, however, as recent US action against Iran has set the stage for further geopolitical volatility.
“We are optimistic that M&A activity will continue in 2020,” said Carolyn Kee, North American head of quality lending capital markets at Citigroup. “Capital markets are in good shape and companies are confident that they will be able to access the market, so hopefully it will be more or less the same.” (Reporting by Michelle Sierra. Editing by Kristen Haunss.)