2020-04-04 IFR Magazine

86 International Financing Review April 4 2020

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Lenders shift gears as coronavirus bites

„ US First-quarter activity hit as fears ripple through loan market

After a robust start, first-quarter activity for US

syndicated loans ground to a halt as the world

came to terms with the coronavirus, which

spooked lenders and rattled markets.

Deals were put on hold, investor meetings

cancelled, 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, 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,

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.

Leveraged loan volume in the first quarter

was US$245.36bn compared to US$167.33bn in

the same period of 2019, or a 46.6% increase.

With the heightened global uncertainty as a

backdrop, total mergers and acquisitions 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 Ryan Kohan,

a portfolio manager at Western Asset Management.

DRAWDOWNS

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. “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

down from US$216.87bn in the same period 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.

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.

Michelle Sierra

Additional reporting by Daniela Guzman and

Aaron Weinman

9 IFR Loans 2327 p 75 - XX.indd 86 03 / 04 / 2020 19 : 26 : 36