In at least one way, the loan market enjoyed an excellent first quarter. Secondary prices rallied like never before, pushing the S&P/LSTA Leveraged Loan Index up a record-breaking 8.2% between Jan. 1 and March 25.
A combination of two technical trends sparked the advance. Loan repayment rates soared to $21 billion in the first quarter, from a quarterly average of $12 billion last year. On the other hand, visible portfolio sales plunged to $1.5 billion during the opening quarter of '09, from $5.7 billion in the fourth quarter.
With money flowing back into the market and forced sales abating, accounts bid up loans, emphasizing credit quality. Thus, BB loans posted a 12.7% return during the first quarter, outpacing single-B loans at 7.4%, while CCCs remained in the red at negative 11.8%.
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These better technical conditions, however, did little to
reinvigorate the new-issue market in early 2009. The primary market, in
fact, remained gridlocked during the first quarter. Instead,
participants spent the opening act of 2009 dealing with the fallout of
recent years as the credit boom of 2006 and 2007 gave way to the bust
of 2008.
The first quarter, therefore, centered on amendments and deals
issuers required to preserve liquidity: debtor-in-possession and
asset-based loans. With the traditional leveraged market drivers --
leveraged buyouts, refinancings, recapitalizations -- stalled, loan
volume remained anemic at $11.3 billion in the first quarter, down 75%
year-over-year but up 30% from the fourth quarter, when activity fell
to $8.7 billion, the lowest sum since at least 1997, when Standard & Poor's Leveraged Commentary & Data started tracking these data.
Loan volume over the past two quarters fell to just $20 billion,
less than half the prior six-month low of $45 billion during the second
half of 2001.
With loan default rates spiking to 5.61% in the first quarter, from
3.75% at year's end, and M&A on ice, DIPs accounted for an
unprecedented share of volume at 42%. Among nondefaulted issuers,
first-quarter volume was a mere $6.6 billion, down from $7.9 billion in
the fourth quarter and $44.5 billion in first-quarter 2008.
The terms of these deals show why volume is off so significantly. Take TNS Inc., which secured the only M&A-related institutional loan to hit the market in the first quarter. The $250 million, SunTrust Banks Inc.-led credit will finance the transaction-processing issuer's acquisition of VeriSign Inc.'s
communication services group. The loan was talked at LIBOR plus 600
basis points with a 3.5% LIBOR floor and an original issue discount of
90. In addition, the five-year loan has an old-fashioned amortization
schedule that reduces the average life to 2.75 years. Add it up and the
implied yield-to-maturity of the loan is 15.42%.
The deal is structured to appeal to the broadest gamut of investors.
First there's the loan's significant new-issue premium -- the average
secondary yield-to-maturity of B+/B1 loans stood at 10.13% as of March
24 -- that could appeal to pension funds, hedge funds and other
nontraditional loan investors. Second, it offers a bank-friendly
amortization table.
This, apparently, is what it takes to get new-issue loans into the
game in 2009 and why most issuers either stay on the sidelines or tap
the bond market. There's a reason high-yield-bond issuance lapped
non-DIP loan issuance so far this year by $12.5 billion to $6.6
billion. During the first quarter of 2008, by contrast, loan volume
dwarfed high yield: $46 billion to $10.7 billion.
Looking ahead, arrangers don't see much changing. Certainly, the
second half of 2009 could provide some opportunities if the enthusiasm
surrounding the latest iteration is borne out by a sustained rise of
stock prices or if the Term Asset-Backed Securities Loan Facility
program expands to include collateralized-loan-obligation liabilities.
But from today's vantage point, there is little good on the way. The
economy remains mired in recession, defaults are spiking, and earnings
remain under pressure. Participants, therefore, expect to spend the
second quarter -- and likely the balance of 2009 -- on the same ugly
business that consumed the first quarter: DIPs, amendments, asset-based
lending, debt exchanges and defaults.
Arrangers expect the market to see a few new loans in the months
ahead. But when asked when robust new-issue flow will commence,
arrangers are quick to dust off the Brooklyn Dodgers' mantra of yore:
Wait till next year.
Steven Miller is managing director at Standard & Poor's Leveraged Commentary and Data.
