U.S. High Grade Loan Volume Set to Fall After 2021 Covid Bump

(Bloomberg) -- The U.S. investment-grade loan market is set to return to normality in 2022 after loans delayed early in the pandemic were shifted into this year, making it among the busiest on record, according to some of the market’s lead deal arrangers. 

Blue-chip companies have raised more than $1.2 trillion in revolving credit facilities, term loans, and other syndicated loans held by their banking groups through Dec. 17, putting the market on track to beat the record set in 2018, according to Bloomberg league table data. 

That’s about 60% higher than full-year 2020 volume, a year marked by the start of the Covid-19 pandemic, which disrupted credit markets and led to a temporary increase in prices for borrowers. Many companies that would have normally refinanced revolvers instead waited on the sidelines until this year. 

“There was a bit of pent up volume from borrowers who opted to do nothing in 2020 during Covid,” said Tom Cassin, head of investment-grade finance at JPMorgan Chase & Co.

Now volume is expected to normalize closer to 2019 levels, Cassin added. His peers at Bank of America Corp. and Citigroup Inc. agree to not expect another record year. 

“We’re not going to expect to see record volumes in 2022 just because we’ve seen such strong volumes in 2021,” said Peter Hall, head of investment-grade loans at Bank of America.

Relatively strong acquisition and spinoff activity by investment-grade companies also helped boost volume this year, such as the $41.5 billion bridge loan for AT&T Inc.’s spinoff of its media business. 

JPMorgan’s Cassin expects debt-financed acquisition deals to be an active part of the market next year. “Banks are healthy and strong and generally have an appetite to commit capital,” he said.

Spinoffs should continue to help drive loan volume in 2022, said Susan Olsen, head of North America investment-grade loans at Citigroup. This past year saw large examples such as VMware Inc.’s spinoff from Dell Technologies Inc. and Kyndryl Holdings Inc.’s spinoff from International Business Machines Corp, she added.

While there still has been growth in term loan volume, demand would have been higher this year if it weren’t for “how strong the bond market has been, and the emergence of callable short-dated debt in the bond market, which is very competitive from a price perspective with the loan market,” JPMorgan’s Cassin said.

Libor Transition

After years of preparation, the market will no longer be able to issue new loans that use the London interbank offered rate benchmark starting on Jan. 1. Investment-grade loans have already seen a number of deals based on regulators’ preferred replacement called SOFR, or the Secured Overnight Financing Rate, after Ford Motor Co. led the way with the first revolver linked to the new benchmark in September.  

Overall, banks and companies have been using a handful of ways of expressing the pricing for loans tied to SOFR. Those include adding a “credit spread adjustment” to SOFR to account for the fact that the rate tends to be lower than Libor, then adding the usual margin on top of that, or just using a higher margin to account for the differences in benchmarks. 

“It’s going to be on a case-by-case basis until we find some volume of consistency,” said Citigroup’s Olsen, where the bank has initially been focused on just boosting the margin for new SOFR loans.

Sustainability-Linked Loans

Sustainability-linked loans, whose interest rates are tied to the borrower’s meeting specific environmental, social, and governance goals, have exploded in the U.S. in the last year. Volume hit around $133 billion in 2021 through Dec. 17, surging from the $13.8 billion in 2020, according to Bloomberg data. 

“We’re prepared for it. We’re excited for it. The trend will continue,” Bank of America’s Hall said. “You’re going to continue to see companies, as they have more time to think about it and be asked by their boards and stakeholders, to manage their companies based upon sustainability goals.”

While ESG financing has expanded rapidly in the last year across many asset classes, concerns about “greenwashing” have also grown. 

“Making sure there are robust goals and that there is independent verification,” are going to be key priorities for banks as the market sees more sustainability-linked loans in the coming years, Citigroup’s Olsen said. 

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