The European Central Bank raised its main refinancing rate for the ninth consecutive time to 4.25% in July, and in the UK, the Bank of England increased its base rate for the 14th consecutive time to 5.25% in August. In July, the US Federal Reserve raised its key borrowing by 0.25% to the 5.25% to 5.5% range-the highest level in 22 years. In the US and Europe, sustained high core inflation and rising interest rates have remained the biggest obstacles to a rebound in issuance, with higher rates negatively impacting appetite for floating rate-based loans. In Western and Southern Europe, issuance over the same period was down 27.2%, dropping from US$98.1 billion to US$71.4 billion, while in APAC (excluding Japan) issuance of leveraged and non-leveraged loans fell by 43.6%, from US$196.9 billion in H1 2022 to US$111.1 billion in H1 2023. those which present the most risk.The first half of 2023 has proven to be a challenging period for loan issuance across the globe, with double-digit, year-on-year declines in activity observed in all major jurisdictions.Īccording to Debtwire Par data, US leveraged loan issuance for the first six months of 2023 slid by a little more than a third year-on-year, falling from US$632.3 billion in H1 2022 to US$424.1 billion in H1 2023. Yet, banks hold only 24.4% of special mention and classified loans, i.e. Direct lenders, which are not regulated by bank regulators and therefore not bound by regulatory constraints of banks, tend to focus on smaller loan sizes in broadly syndicated lending arrangements, albeit they are becoming more active in size.įederal Deposit Insurance Corporation and Office of the Comptroller of the Currency indicated that banks hold 63% of SNC bank-identified leveraged loans, most of which consist of higher rated and investment grade equivalent revolvers. In recent years, investors (typically funds) have increased the amount of lending they do directly with corporations, in direct lending arrangements. According to the Federal Reserve, CLOs hold over 50% of outstanding institutional leveraged loans. CLO purchases continue to be a significant buyer of below investment grade corporate debt. Leveraged loans are primarily held by banks, non-bank companies (insurance companies, finance companies), asset managers (in a loan mutual fund) or collateralized loan obligations (CLOs). While the residential mortgage market has around $10.6 trillion in loans outstanding and the broader fixed income markets have $50.9 trillion in securities outstanding, there are only $1.6 trillion in leveraged loans outstanding. The leveraged loan market is a small but important piece of the U.S. How Big is the Market and Who Holds Leveraged Loans? The principal amount of term loans outstanding is estimated to be roughly double the size of revolving facilities. Revolvers are types of loans that can be repeatedly drawn upon and repaid like a credit card, typically originated and held by banks. Term loans are similar to traditional loans where funding is disbursed at origination and repaid over time, typically held by non-bank institutional lenders such as insurance companies, asset managers, etc. The two most common kinds of financing facilities are term loans and revolving facilities. A leveraged loan may be originated for a variety of reasons – general corporate purposes, refinance an existing loan, part of a recapitalization, finance a leveraged buyout, etc.
Around 69% of companies in America hold below investment grade ratings. Leveraged loans are a type of syndicated loan for below investment grade companies (credit rating below BBB- or Baa3).