January Saw Record US Leveraged Loan Issuance

January saw record US leveraged loan issuance, with no sign of discomfort from investors in the market. Investors’ optimism that looser

monetary policy is back on the table has helped fuel demand for lending; however, current conditions present challenges that should be taken into consideration by loan investors.

Leveraged loans are one of the most widely held asset classes in global fixed income markets, used to finance acquisitions, recapitalize companies, and pay dividends. Hedge fund strategies often utilize leveraged loans as part of their strategies while other bond portfolios use them extensively as well. Leveraged loans tend to be considered less risky than other forms of debt due to being supported by an institutional buyer base such as CLOs with long-term commitments that commit them.

However, it’s important to keep in mind that credit markets are cyclical; during an economic slowdown or recession, leveraged loans could suffer severely due to revenue streams diminishing or ceasing altogether as companies may require extra financing in order to meet operating expenses.

Before investing, it is vitally important to fully comprehend both the risks and rewards associated with lending in the leveraged loan market. Furthermore, there are some distinct differences between investment grade loan markets and leveraged loan markets.

CLOs are typically the primary market for non-investment grade loans in the US, purchasing them from syndications through either committed financings or best efforts syndications and selling it back. Most investors in this debt are institutions. Loans may be secured and converted to bonds or equity depending on the needs of both company and investor.

The US loan market experienced an eventful first quarter in 2024, beginning the year on an auspicious note and showing promising signs for economic expansion. Moderating inflation, soothing labor market conditions, and an increasing consensus regarding soft landing supported investor appetite for levered credit while prompting borrowers/arrangers to access secondary market loans to reduce borrowing costs – leading to near record percentage of loans trading above par and encouraging an uptick in broadly syndicated loan issuance across both quarters of 2024.

CLO issuance also increased dramatically, reaching $86.3 billion, the highest total since June of 2022. Concurrently, European loan and high yield markets experienced a surge in primary activity as well – due to factors like robust retail fund flows and strong institutional demand for leveraged loans – leading to tightened European loan/high yield spreads by 20-80 bps globally in October.