Welcome to the Corona Correction series in association with Refinitiv, I'm your host,
Roger Hirst.
In early March, Dave Puchowski, Refinitiv Director of Market Analysis in the loans and
credit space, outlined a market in which volumes had dried up, and terms of transaction was
shifting towards lenders.
But he also indicated that regulators and lenders were showing flexibility to help corporates
navigate these extremely uncertain times.
I asked Dave for an update in this space.
So in the high-grade bank loan market, there's been a lot less strain than there was a month
ago.
Back then, they were dealing with the frenetic pace of borrowers drawing down on their revolving
credits or issuing incremental loans to try and bolster liquidity positions.
In the U.S we tracked over $150 billion in drawdowns and another roughly $165 billion
in incremental facilities associated with enhancing liquidity during the crisis.
Now, starting around two or three weeks ago, that activity slowed down.
Due to favorable conditions in the bond market issuers have been able to go there to issue
debt, many to pay back the amounts they had drawn down upon in the loan market.
So instead, bank loan lenders have now shifted attention to loan amendments.
Since many borrowers are not going to hit the financial targets engineered into the
loan agreements, to avoid breaching the covenant, they amend the deals to loosen the financial
covenant for a few quarters out, internal lenders get paid a fee and a little bump in
spread.
They've also been baking in more lender protections into the documentation during the amendment
process, including adding language for libor floors, a condition normally seen on the riskier
side of the market.
As far as refinancings in the investment grade space, issuers are really only able to do
a short term refi.
They'll sit on the five year revolver for the time being and simply roll over the 364
day revolver.
Those shorter term tranches have become a bit more expensive due to the crisis.
For a triple-B name they're paying on average over 20 basis points for an undrawn fee.
That's the highest since 2011.
Over in the leveraged side of the market, we've seen loan volumes plummet.
Only $12 billion of completed volume in 2Q.
That's 77 percent lower year over year.
Now, the high yield bond market has been the more attractive market lately, with issuers
locking in longer term debt where they can.
And the retail fund flows reflect this, where there's been over $3 billion placed in the
high yield bond funds the last two weeks, while in contrast, loan funds continue to
see outflows.
That aside, there is a good chunk of change hitting the market this week.
$8 billion in loans hitting the market this week for the T-Mobile Sprint tie-up.
So that's a positive for a market desperate need of some supply.
Now lenders continue to say price discovery is a hurdle, but there's a little bit better
guidance now than there was in March.
It's really case by case and dependent upon rating profile and sector.
And there's a wildcard, which is the slew of downgrades that are still expected to come.
We've already seen hundreds of loan issuers get downgraded since March, and expectations
are there's more to come.
Really hard to count pricing with so much uncertainty.
And then, of course, you have a lack of M&A in the market right now.
T-Mobile Sprint aside, that deal has been in the works for years, but lenders are telling
us there is going to be very little activity in the short term, and that will impact loan
volumes in both the high grade and leverage spaces.
There's just too much uncertainty at the moment for anyone to feel confident to pull a trigger
on a deal.
Maybe a little further down the road, the crisis will spur activity, but no one sees
that happening anytime soon.
Dave outlined a market in which, although under pressure, has shown a great deal of
flexibility in order to protect both borrowers and lenders.
In the early phases of the crisis, drawdowns of incremental facilities provided over $300
billions worth of buffer for corporate's.
Since then we have seen an unprecedented intervention by the Fed in both investment grade and high
yield.
And although volumes remain thin, government support has clearly stabilized these markets
and encouraged the return of retail investors.
But uncertainty remains.
Support for asset prices is not the same as support for the economy, and the default cycle
is still ahead of us.
Refinitiv's director of Deals Intelligence Matt Toole, recently indicated that the US
had seen the first week in 16 years with no M&A deals bigger than $1 billion.
With M&A remaining subdued and corporate cash flows likely to suffer well into the summer,
there will still be some stresses across the sector, though not of the scale and speed
that might have been envisaged in early March.
We'll see you later with another update.