By Michelle Sierra
NEW YORK, April 1 (LPC) - After a robust start, first quarter activity for US syndicated loans ground to a halt as the world came to terms with COVID-19, a new and deadly disease that spooked lenders and rattled markets. Deals were put on hold, investor meetings canceled, and fundraising schedules postponed as market participants faced a health crisis of unprecedented reach and magnitude.
As the virus spread across continents, leveraged borrowers put the brakes on the frantic refinancing activity that took place early in the quarter, while investors reassessed their appetite for risk. Healthcare companies such as Bausch Health and Pharmaceutical Product Development (PPD), as well as British technology firm Micro Focus pulled transactions as the borrower-friendly market all but vanished.
Investors took shelter in metals and government bonds. Loan funds saw US$11.6bn of outflows, according to Refinitiv Lipper.
After a slow first two months in the investment grade loan market, better-rated companies such as General Motors, Ford Motor Co, Anheuser-Busch InBev and Petrobras opted to hoard liquidity as they borrowed from revolving credit lines that they usually leave untapped.
Despite the panic in the latter part of the quarter, institutional issuance still spiked 170.5% year-over-year, with US$180.88bn of volume in the first three months of the year versus US$66.87bn in the same period the year prior. Numbers also went up 30.1% from quarter to quarter with just US$87.88bn arranged in the last quarter of 2019.
Leveraged loan volume in the first quarter was US$245.36bn compared to US$167.33bn in the same period the year prior, or a 46.6% increase. Leveraged loan volume was US$224.72bn in the fourth quarter of 2019.
With the heightened global uncertainty as a backdrop, total mergers and acquisitions (M&A) volume took a beating and year-over-year numbers slumped 40.6%. There was US$87.77bn in total M&A volume in the first quarter, versus US$147.74bn in the same period of 2019. Investment grade M&A volume suffered the largest drop, down 76.9%, or US$19.09bn versus US$82.65bn in the same quarter last year. Leveraged volume was down 7% with US$58.63bn in the first quarter of 2020.
As investors took a flight from risk, traditional middle market deals led the 38.1% decline in issuance quarter to quarter.
“Most of the deals are getting pushed because pricing has to reset itself, and the market has to determine where yields should be,” said then Ryan Kohan, a portfolio manager at Western Asset Management.
As leveraged lending disappeared, investment grade lending became the forefront of activity in the loan market.
Bankers started the quarter eager to deploy cash for M&A, but uncertainty linked to the US presidential election and green shoots of news of the outbreak curbed activity. Corporates in discussion with lenders about transformational transactions held off until the market impact from the virus was more fully understood.
"Nobody knows the magnitude of the impact," a senior lender at a US bank said. "Up until last week, a lot of refinancing discussions were happening and corporates were thinking of going to market before the US election. Now there's likely to be a pause until there's a little more clarity about anything."
Investment grade volumes finished the quarter down 12.7% year over year with US$189.36bn in the first three months of 2020 vis-à-vis US$216.87bn in the same period of 2019. Volumes also continued to drop quarter-over-quarter from US$192.15bn in the final three months of 2019.
New money issuance for investment grade borrowers took the most significant hit with US$37.25bn of loans in the first quarter compared to US$89.03bn in the same period of 2019, a 58% drop. Despite the fall, it is an improvement from US$10.70bn in the fourth quarter of 2019.
There were 91 deals in the first quarter, down from 101 in the same period of 2019. It is a slight drop from the quarter over quarter amount of 104 deals in October, November and December of 2019.
According to JP Morgan, by March 27 there had been US$227bn in revolver drawdowns, with 53% of announced borrowings done by investment grade firms. More are expected to follow.
Daniela Guzman and Aaron Weinman provided additional reporting. (Reporting by Michelle Sierra. Editing by Kristen Haunss.)