October 10, 2024 - Third quarter leveraged lending activity declined to $297 billion, down 38% quarter-over-quarter, but nearly double the level reported at the same time last year, according to LSEG LPC.  Institutional lending, which still surpassed $200 billion in the quarter, contracted 40% from the second quarter’s record-breaking pace but nevertheless came in 130% higher year-over-year.  Institutional activity has now exceeded $800 billion this year, up a staggering 265% over the first nine months of last year. 

While overall lending activity contracted as the refinancing engine stalled during the third quarter, a better view on rates and the economy led a resurgence in M&A activity.  According to Pitchbook|LCD, non-refinancing third quarter deal flow increased a healthy 59% after totaling a 10-quarter best $81 billion in new transactions – with LBO financing increasing to the highest level in 2.5 years.  On the opposite side of the ledger, refinancing activity dropped 69% to a seven-quarter low of just $30 billion with repricing activity (via amendments) falling 55% to a three-quarter low of $101 billion.  Even still, refinancing activity has totaled a record $210 billion so far this year; almost double the amount across the same time last year.  Furthermore, and even more striking, repricings reached a record $479 billion – roughly $133 billion higher than the first three quarters of the last five years combined. 

All told, an astonishing 61% of outstanding loans have been either repaid, repriced or extended this year.  Furthermore, Pitchbook|LCD also noted that borrowers were able to lower the spread on $511 billion of institutional term loans, or a 38% share of all outstanding loans, with the average spread cut at 53 basis points.  While a net positive for corporate borrowers (and coverage ratios), lenders are now coping with not only lower spreads but also a declining base rate across the portfolio.  In September alone, new issue institutional clearing yields fell by more than 100 basis points to 8.4%.  LSEG LPC went on to explain that the tightening was most evident in spreads, which tightened 55 basis points to an average of 327 basis points.  Meanwhile, the SOFR base rate tightened 32 basis points as the Fed’s 50 basis point rate cut began to take effect in late September.  That all said, yield levels north of 8% remain enticing and currently stand 80 basis points richer than their four-year average.