Leveraged loan markets across the US and Europe recorded a busy start to the year, with ample liquidity and attractive terms encouraging borrowers to raise financing. In Asia-Pacific (APAC), a quiet January saw issuance for Q1 2021 edge lower, although the market gained momentum in February and March.

Leveraged loan issuance in the US climbed to US$389 billion in Q1 2021, up 18% year-on-year from the US$329.7 billion recorded in Q1 2020. The rise in institutional loan activity during the same periods—up from US$225.1 billion in Q1 2020 to US$308.7 billion in Q1 2021—was especially pronounced on the back of strong investor demand for yield.

In Western and Southern Europe, leveraged loan markets were equally active, rising to US$99.6 billion over the first three months of 2021, up from US$75.2 billion in the first quarter of 2020. Institutional issuers were also enthusiastic, with institutional issuance coming in at a record quarterly high of US$69.2 billion.

Total loan value (including leveraged and non-leveraged loans) for Q1 2021 in APAC (excl. Japan), however, dropped 9% from US$75.2 billion in Q1 2020 to US$68.8 billion year-on-year. Much of this decline can be attributed to reduced activity levels in January 2021, when issuance fell 48.4% year-on-year to US$13.3 billion according to Debtwire Par. The dust has since settled, with year-on-year issuance for February edging 0.7% higher—and by March, issuance was up 30.4% year-on-year as a number of big-ticket deals tapped the market, giving cause for optimism for the year ahead.

Refinancing drives US and European markets

The strong figures in the US and Europe for Q1 2021 were underpinned by a high volume of refinancing activity, with borrowers coming to market in numbers to refinance existing debt and extend maturities on favorable terms.

In Western and Southern Europe, refinancing totaled US$34.2 billion in Q1 2021—double the US$17.1 billion raised for M&A (excluding buyouts). In the US, refinancing was up 61% year-on-year at US$157.6 billion.

Notable loan refinancings in the US included a US$3.5 billion term loan B refinancing for American Airlines, and a US$2 billion refinancing by CSC Serviceworks, a provider of laundry and air services. In Europe, French supermarket chain Casino secured a €1 billion refinancing package, while Groupe CEP, the insurance broker backed by private equity firm Bridgepoint, closed a €805 million refinancing.

In both the US and Europe, the high volumes of refinancing activity can be attributed to a shortage of new deal opportunities, with supply unable to meet demand from lenders eager to deploy.

Total new money issuance in Europe during the first quarter was up just 7% according to Debtwire Par, versus an 18% rise in overall leveraged loan issuance. The contrast in the institutional part of the market was even more stark, with new money institutional issuance down by one-fifth, as opposed to a 19% rise in total institutional issuance. US markets saw new money issuance slide 11%, with new money institutional issuance down 2% year-on-year.

In Europe and the US, opportunities to back new M&A and PE buyout deals have been scarce. In Europe, for example, approximately one-third of the buyout deals that came to market were secondary buyouts, where demand for incremental new debt is usually limited.

In the US, many Q1 2021 buyout transactions were either too small for the syndicated loan market or went to private debt lenders who were able to compete for deals on flexibility and speed of execution.

Asia relies on big-ticket deals

The APAC market relied on a selection of large transactions to limit the fall in year-on-year issuance. Deals sized at US$1 billion or more in the region (excluding Japan) totaled US$35 billion in Q1 2021, accounting for 48.2% of quarterly volume according to Debtwire Par. This compares to the 33% share for similarly-sized deals in Q1 2020.

Tech conglomerate Tencent led the way with the closing of a US$8.3 billion five-year loan. This is the group’s largest-ever loan and the second-largest offshore loan secured by a Chinese company since 2013.

Other larger loan deals saw Hong Kong real estate developer Sun Hung Kai properties seal a HK$16.8 billion (US$2.16 billion) five-year loan that was upsized more than threefold from the HK$5 billion target.

In Australia, Macquarie Group landed a five-year US$2.51 billion facility, while Global Infrastructure Partners secured a US$2.29 billion loan to back its purchase of a stake in a natural gas plant from Royal Dutch Shell.

M&A is expected to remain an important source of new deals across APAC in Q2 2021, with a number of deals in the pipeline. For example, in Australia, a consortium of Macquarie Infrastructure and Real Assets and Aware Super is expected to launch a A$2.15 billion (US$1.64 billion) term loan B for a buyout of telecoms group Vocus. KKR is also anticipated to seek a term loan B to fund a A$1.7 billion purchase of a 55% stake in Colonial First State Investments from Commonwealth Bank of Australia.

In China, meanwhile, package deliveries services group SF Holding has launched a HK$18 billion (US$2.31 billion) bridge loan to fund a portion of its planned purchase of Kerry Logistic Network.

Demand sees pricing tighten

Strong investor demand for deals in the US and Europe has given borrowers more negotiating power and tighter pricing. In the US, for example, pricing on weighted average margins on first-lien institutional loans was recorded at 3.47% over LIBOR in Q1 2021, according to Debtwire Par—down from 4.17% over LIBOR in Q4 2020.

Debtwire Par also recorded 91 facilities worth around US$80 billion where pricing was reverse flexed in favor of borrowers in Q1 2021, while only 20 loans with value totaling US$12 billion were required to flex and widen prices in negotiations.

In Europe, first-lien institutional loan margins also narrowed, from 4.01% over Euribor in Q4 2020 to 3.71% over Euribor in Q1 2021. Europe also saw reverse flexes on pricing outpace flexes in favor of lenders. Some 31 deals reverse flexed, with only two flexing up.