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US Chart of the Week: 14th October
The lack of new loan supply combined with a healthy CLO appetite in 3Q20 (USD 24.6bn in new issue) resulted in a supply-demand mismatch in 3Q20, helping to make it more of a borrower’s market relative to conditions in 2Q20.
Though institutional loan volume picked up to USD 87bn in 3Q20, with September posting the highest monthly volume figure of the quarter at USD 36.9bn, the increase was driven by refinancings as companies sought to push out maturities and alleviate near-term debt pressures.
Looking at new money activity, M&A loan issuance declined to USD 7.8bn in September from USD 11.6bn in August, and quarterly volume at USD 27.4bn remained far below the first-quarter figure of USD 65.9bn.
The mismatch between new supply and demand contributed to tighter pricing, with the average margin on institutional term loans falling to 439bps in the third quarter from 494bps in the prior quarter. Higher rated loans led the tightening, though margins remain above pre-COVID levels. Weighted average margins on double-B rated first-lien loans tightened to 345 bps in 3Q20 from 453bps in 2Q20. Single-B margins declined to 429bps from 457bps.
It was the same story for OIDs (original issue discounts) and LIBOR floors. OIDs narrowed to 98.28 in 3Q20 from 97.32 in 2Q20, though they were still much wider than the 1Q20 average of 99.75. On top of this, the frequency of LIBOR floors above 0%, while still very prevalent in the market, are below where they were in 2Q20. Roughly 48% of institutional loans had a LIBOR floor at or above 1% in the most recent quarter, down from 59% in 2Q20, but still far above the 12% of deals in this category in 1Q20.
Taken altogether, these factors led to a tightening of institutional loan yields to 5.3% in 3Q20, down from 6.4% in 2Q20.
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