Investment Banking

Leveraged Finance: Investors Narrow Their Focus on Higher-Quality Borrowers

Bifurcation in the leveraged finance market became more pronounced during the fourth quarter, as investors continued their flight to quality.

In the final months of 2019, lenders expanded on a year-long trend that has made life difficult for less creditworthy borrowers looking to raise debt capital. Despite public equity markets flirting with all-time highs and available capital piling up on the sidelines, many lenders believe that the end of the current cycle is fast approaching.

Thus, lenders continue to shift their focus to credit quality, creating a bifurcation in the market between higher- and lower-quality credits, a trend that intensified in the fourth quarter. In November, for example, the gap between double-B and single-B clearing spreads in the institutional loan market peaked at 233 basis points, up from 67 basis points at the beginning of 2019.

Loan volume was muted during the fourth quarter as lenders became increasingly discerning. Lenders, however, weren't the only investors shying away from the riskier corners of the market. M&A-related institutional loan volume fell 40% from both the previous quarter and the prior year; the $29.2 billion of volume in the fourth quarter was the lowest quarterly figure since 2013.

While declining rates helped revive the opportunistic market, it wasn't enough to offset the M&A-related decline. Overall, total leveraged loan volume fell to $103 billion, down 23% from the previous quarter and down 15% year-over-year.

Highlights of this quarter's Leveraged Finance report include:

  • 2020 vision: expectations for the leveraged loan market
  • Interest rate expectations: negative thoughts about negative rates
  • Highlights from William Blair's Quarterly Leveraged Lender Survey

Each quarter we ask middle-market lenders to rate overall conditions in the leveraged finance market on a scale of 1 to 5, with 5 being the most borrower-friendly conceivable. After a full year at its peak of 4.6, the trend over the past six quarters continues to move in lenders' favor.


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