Debt Download
June 27, 2024

Debt Download

Welcome to Debt Download, Goodwin’s monthly newsletter covering what you need to know in the leveraged finance market. We hope you have a water-resistant tablet, because this month’s edition is the perfect beach read, with gripping tension between syndicated and private lenders and suspense as to the Fed’s next move.

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In the News

  • Borrowers again flocked to the broadly syndicated loan (BSL) markets in May—and were again rewarded with favorable terms, according to Covenant Review.  New issuances hit $20.5 billion, well up from $13 billion in April. May’s tally, though historically high, is still well short of the $37.4 billion in demand, bringing the year-to-date supply shortage to more than $100 billion, according to PitchBook. High demand drove arrangers to tighten pricing for 58 loans during syndication and loosen three, for a borrower-friendly 19.3:1 ratio compared with 13.7:1 in April. The all-in clearing spreads of single-B loans generally followed the same trajectory, dropping to S+360 (S+355/99.8 OID) from S+393 (S+382/99.6) in April. As prices tighten, documentation loosens, with 82% of the loans tracked by Covenant Review not flexing any covenant terms, a record and up from 57% in April. Default activity for the month fell to $3.5 billion, from $7.2 billion, for a default rate of 4.3% for the 12 months ended in May.
  • A wave of repricings continues to dominate the BSL market, with borrowers saving $1.4 billion in average interest expense so far this year and shaving off an average of 50 basis points from their margins. LCD activity (A&E) to start the year, noted year-to-date totals already exceed each year from 2014-18 and 2020. Adding in $19.6 billion for May (compared with $14.9 billion in April), the year-to-date tally stands at $94.5 billion, from last year’s still-solid $75.6 billion. LCD points out how surprising all this is, given that the average yield-to-maturity for refinancing BSLs is a historically high 9% this year and was 9.6% in 2023, a 23-year high. In fact, despite high interest rates, the overall spreads in the BSL market have been ticking down, attracting borrowers to their relative value. Because of the near-record-breaking repricing activity, LCD finds an overall spread compression of eight basis points in the Morningstar LSTA US Leveraged Loan Index, with higher-rated borrowers enjoying steeper drops; the weighted average nominal spread of all BSLs in the index stood at 361 bps at the end of May, from 369 at the start of the year.
  • The tug-of-war between eager lenders and loan opportunities has also bolstered dividend recapitalization deals, especially in this sluggish environment for PE exit opportunities. Issuances funding a dividend hit $35.3 billion at June 11, tying the record-strong start to 2013. Sponsored deals accounted for $30.2 billion of that total. Of course, syndicated lenders are also finding themselves competing against private lenders—for dividend deals as elsewhere. LCD reports that borrowers with an EBITDA of $50 million can find comparable terms in the private debt market, with spreads below S+500. 
  • Even so, while the leveraged loan market is being called the hottest asset class, some investors are wondering if the “golden moment” of the private-credit asset class has come and gone. Limited partners are increasingly frustrated at private credit funds’ inability to match prior returns, such as the 12% they saw in 2023. One emerging area of weakness is the tightening spread in the face of competition with BSLs and “muted” deal volume, which has led to an “erosion of the private credit illiquidity premium.” Another indication of the slide of private credit, according to investors, is the proliferation of creditor violence (see below for more on that). These trends will accelerate as we begin to see defaults in the private credit space, according to British Columbia Investment Management. If that happens, “tourist investors” will discover the stability of the past five years was the result of an “artificial market.”  
  • Quick roundup of recent new direct lender debt funds and related news:
  • The technology media and telecoms (TMT) industry has been battling systemic issues—such as declining ad revenue and a loss of subscribers—and, recently and more increasingly, its lenders. Debtwire reports at least 11 TMT companies have engaged in a liability management transaction, beginning with Lumen Technologies in October 2023. In one instance, Pluralsight, a technology learning platform backed by Vista Equity Partners, raised preferred equity in a drop-down of IP assets to a subsidiary. Pluralsight used the new financing to pay interest obligations, while Vista wrote off its equity stake in the company. The occurrence of a J. Crew style transaction in private credit is bringing increased scrutiny to terms that direct lenders have agreed to in their documents, especially as more covenant-lite deals are in the market. Debtwire estimates that approximately 20 firms are now “candidates” to engage in some creditor violence.
  • One mode of attack these candidates (or their lenders) might want to look out for is the “free and clear” basket in their accordion. In this market alert, Covenant Review focuses on the ability of sponsors to increase the “free-and-clear”  incremental amount with additional amounts under the “pick your poison” debt basket and/or general liens basket. This could allow for additional secured debt under the incremental provision without having a corresponding negative covenant against liens securing such debt—potentially creating “uncapped debt capacity” and, in any event, a pari passu secured debt allowance that may become a nasty surprise for existing lenders.

Goodwin Insights – Record Use of Add-On Acquisitions in Private Equity Is Likely to Continue as Markets Recover

The lending landscape is not the only one to have adjusted to today’s dynamic of low spreads amid a competitive M&A environment. Private equity sponsors have increasingly turned to smaller add-on acquisitions to build value in their portfolios, while keeping EBITDA and revenue multipliers low. Goodwin partners James Moriarty and Gregory C. Cage and associate Victoria Woodward take a deep-dive into the trend, parsing the statistics over the past few years, unpacking the advantages of these transactions and providing practice tips. Check out and share their Insight here.

In Case You Missed It – Check out these other recent Goodwin publications: Navigating Bank Failures: Lessons Learned; CFPB Reports Troubling Trends in Credit Card Rewards Programs; Horizon Scan for Private Investment Funds; CFPB Takes Action to Ensure Consumers Can Dispute Charges and Obtain Refunds on Buy Now, Pay Later Loans; The Corporate Transparency Act: Overview and Estate-Planning Considerations; Which Jobs More Frequently Require Non-Compete Agreements?; Significant State Regulatory Development in the Virtual Currency Industry in California and New York; CFPB Updates its Procedures for Determining Which Nonbanks it Can Supervise


For inquiries regarding Goodwin’s Debt Download or our Debt Finance practice, please contact Dylan S. Brown, Mohammed A. Alvi, and Reid Bagwell.

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