U.S. Second Lien Loan Issuance to Slow in 2015
The volume of U.S. second lien loan issuance is likely to slow slightly in 2015 due to restraints on leverage in bank regulatory leveraged lending guidance, choppy markets and fewer opportunistic refinancing transactions, continuing the slowdown seen in the final months of 2014, according to Fitch Ratings.
Issuance last year totaled $38.7 billion, just shy of the 2007 record of $39.2 billion. A number of factors indicate that volume will remain robust, including solid borrower credit fundamentals, robust M&A, good demand from CLOs, and non-bank underwriter initiatives.
Leveraged oil and gas exploration and production (E&P) companies may be active second-lien loan issuers in 2015 as they look to boost liquidity and fund capex amid lower commodity prices and shrinking revolver borrowing bases. Nearly 13% of total new second lien loan issuance volume in 2014 was attributed to energy lending, compared with less than 10% of the total cumulative volume during the period 2002 – 2014. The energy sector also has the highest share of second lien high-yield bonds maturing in 2015 at 34%.
In addition, Fitch believes that CLO interest in second lien debt will continue as Volcker rules prohibit ownership of unsecured bonds and fund managers pursue higher yields boost returns.
Fitch’s new report includes recovery rates for 61 second lien debt issues and capital structure details for a group of issuers.