U.S. syndicated lending surged before Brexit, election volatility

June 30, 2016
| In the News




Markets | Thu Jun 30, 2016 


Budding optimism about the U.S. economy, rising oil prices and a brief lull in volatility spurred companies to lock in low interest rates in the second quarter, driving U.S. syndicated lending up 55 percent from a four-year low the prior quarter.

The $904.7 billion of loans issued in the first half was nonetheless about 6 percent below the same period last year, according to Thomson Reuters LPC.

While lending gained momentum, the rest of the year is clouded by the uncertainties about the global economy, Federal Reserve policy, ramifications of Britain’s vote to leave the European Union and the impending US elections, investors and strategists said.

“With the Brexit vote and the U.S. elections, there may be periods of volatility,” said Gretchen Lam, portfolio manager at Octagon Credit Investors. “We expect to see a decent loan supply pipeline building post-Labor Day, however year-to-date loan issuance is down materially from 2015.”

Leveraged loan issuance jumped 64 percent in the second quarter from the first three months of the year. Still, the U.S.$344 billion racked up in the first half was almost 16 percent below a year earlier.

Investment-grade issuance leapt 67 percent to a quarterly record of $275 billion. The $439.6 billion issued in the first half of the year was 17 percent higher than a year ago.

Refinancing led the way as U.S. interest rates held lower for longer than many had anticipated.

The downwardly revised Federal Reserve call for two interest rate hikes before year-end is now being questioned by market participants after the Brexit outcome.

As recently as last December, when the Fed raised rates for the first time in nearly a decade, the central bank was looking to raise rates four times this year.

In the absence of Fed hikes so far this year, loans issued to refinance existing debt spiked 90 percent in the second quarter to $370 billion, the most since almost $394 billion in the same quarter last year.

Until the long-awaited Fed rate hikes resume, investors in floating-rate loans remain hesitant to load up on the asset class.

“There’s still a lot of caution in terms of leveraged loans, with people worried about illiquidity and about selling pressure from hedge funds facing redemptions,” said Kevin Lyons, head of credit and fixed income for hedge funds at Aberdeen Asset Management.

Retail accounts pulled $6.3 billion from bank loan funds this year through June 22, while pouring $5 billion into high-yield bond funds, according to Lipper.

“If investors see that the economy is on solid footing, and if the Fed does hike rates, it could make leveraged loans more attractive versus high-yield bonds,” said Lyons.

Looming regulatory constraints are also curbing demand from Collateralized Loan Obligation funds, the biggest buyers of leveraged loans. CLO issuance this year has tumbled to $25.7 billion from $56.9 billion in the same period last year.


Syndicated lending to back U.S. mergers and acquisitions reached $230.7 billion in the first half, up 11 percent from the same period a year earlier.

Whether there will be a flow of sizable corporate marriages such as software company Microsoft’s (MSFT.O) $26.2 billion buy of professional social networking company Linkedin (LNKD.N), announced in mid-June, depends largely on the economic outlook and market climate.

“M&A activity levels are predicated on CEO confidence, which is currently tepid given market volatility, expectations of rate hikes and slack economic outlook and will remain that way until uncertainty around these conditions improves,” said Christopher Wu, partner at Carl Marks Advisors.

The economy remains vulnerable, and some deals are likely to be deferred until after the US elections, he said.

“The Microsoft/LinkedIn deal does not reflect your average CEO’s confidence in M&A,” said Wu.

Total U.S. syndicated lending has to slightly surpass the first-half pace to match last year’s roughly $2 trillion tally, based on Thomson Reuters LPC data.

“The wild cards for the second half remain the same ones we have seen — commodity prices, China, central bank actions and a number of elections,” said Jonathan DeSimone, managing director at Bain Capital Credit.

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