Oct 16, 2015
From the Global Enterprise Institute
Our Capital Advisory practice is pleased to announce its Q3 2015 Credit Markets Quarterly Update. It provides a snapshot of Q3 2015 credit market activity, including a general overview, trends, pricing and structures.
- Overall, despite the increased skittishness and volatility in the equity markets last quarter, the credit markets in Q3 remained generally receptive to new transactions both in terms of availability and pricing, but the riskier segments of the market such as second lien loans and “junk bonds” have begun to show some signs of weakness and distressed loans are reappearing.
- Newly issued leveraged loan volume decreased to $112 billion last quarter from $140 billion in the prior quarter and $134 billion from last year, although this funding level remains robust.
- LBO transaction pricing continued its upward climb, increasing to a whopping 12.1x LTM EBITDA for middle market companies having EBITDA under $50 million, a high water mark since 2005.
- LBO loan volume remained relatively flat with recent quarters at an elevated level of $35 billion.
- LBO debt multiples for middle market transactions reached a new high of 5.9x, eclipsing the previous cyclical high of 5.6x set in 2007.
- Equity contributions to LBOs increased to 42.8% of the capital structure, higher than at any time since the credit markets froze up in 2008-2010.
- First lien leveraged loan pricing for non-investment grade credits remained mostly steady in the range of L+340 for pro-rata “club” loans to L+414 for institutional syndicated loans on single B rated credits.
- Second lien loan volume remained tepid at $4 billion, a decrease of 50% from Q3 of 2014, and based on year to date volume will most likely finish the year at the lowest level since 2011.
- Second lien loan pricing has increased to approximately L+972, the highest level since 2012.
- High yield bond volume declined precipitously to approximately $40 billion, the lowest level since Q3 of 2011, and unless volume increases significantly in Q4, total high yield volume for all of 2015 will be at the lowest level since 2011.
- High yield bond pricing increased modestly on a yield to maturity basis to approximately 7.1%.
- Funds flows to high yield funds were negative (outflow) for the second quarter in a row and the fourth quarter out of the last five.
- Funds flows to leveraged loan funds remained positive albeit at a subdued level relative to recent quarters.
- CLO activity was down somewhat both in dollar volume and number.
- CLO spreads increased to about L+165, a level at the higher end of the pricing range since 2011.
- Distress indicators up ticked slightly with 5% by number and volume of all outstanding first lien loans trading in the secondary market priced at L+1000 or greater.
- Leveraged loans in default or in bankruptcy is at the highest level since 2010 measured by par amount and percent outstanding.