Morgan Joseph TriArtisan LLC’s newly issued Recapitalization & Restructuring Report says that across most sectors of the debt capital markets, inflows and issuance volumes are approaching, or have exceeded, pre-crisis highs.
  
It points out:

• CLO issuance, fueling approximately 60 percent of the leverage loan market, reached $26.3 billion in the first quarter, implying a one-quarter run rate above the annual highs of 2008’s nearly $100 billion in CLO issuance.
• High yield volumes as of late April are just shy of the record pace that produced $346 billion of new paper in 2012, which it points out was more than double pre-crisis levels.

However, with M&A volumes stagnating since 2010, most debt issuance has been utilized for recapitalization and repricing transactions. The lack of de novo loan demand from growth, be it organic or transactional, has put additional downward pressure on rates, with loans and high yield index yields at or below all-time lows.

Says Jim Decker, a Managing Director who heads the group: “The lack of demand for debt capital, despite attractive rates and terms from lenders, is akin to the housing market of 2010-2012, when home buyers held back because of a lack of confidence or available capital for down payments. Middle market deal making has a similar feel, as financing widely is available but private equity buyers remain disciplined on pricing and deal volumes given the muted fundraising environment, declining dry powder and a glut of yet to be exited investments.”

As alluded to by Mr. Decker, private equity fundraising remains stuck in neutral, despite all the capital being put in play in the leverage markets. Capital raised for private equity funds has lingered at approximately $100 billion annually for the last two years, 35 to 40 percent of the highs reached between 2006 and 2007.

Adds Decker: “Explanations range from overall investor flight to quality in the form of greater capital structure seniority offered by credit funds, to lackluster historical fund performance, or the preponderance of investor capital still locked up in older vintage equity funds. Regardless of the rationale behind the lack of fund raising activity, it is certainly contributing to what continues to be a less than robust M&A market, considering the generous financing terms available in the marketplace.”

Elsewhere on the financing scene, the Morgan Joseph TriArtisan Group observes:

• Competition for loans is fierce in the asset based loan market, with average spreads remaining at or below the 200 basis points mark. However, with structure accommodations being granted only stronger performing borrowers and most banks focused on credit quality, the window has remained open for non-bank ABL lenders in the middle market to accommodate less pristine borrowers at premium pricing.
• Spreads for syndicated loans have hit post-crisis lows with B+/B trading in the 325 to 375 basis point range and BB/BB- in the 200 to 260 bps range. Structures continue to loosen with softer pre-pays, covenants and toggles becoming more standard features.
• Record low interest rates are also creating bizarre restructuring outcomes for lenders. Some are reaping the benefit via large “makewholes” that have been enhanced by treasury based discount rates while others face the risk of becoming termed out at “cramdown” rates, which have historically been tied to the U.S. Prime rate.

The Report also features a Bid Protection study, with an update on trends in break-up fees and expense reimbursements (“there is a noticeable spike in break-up fee and expense reimbursement in 2012”) and the quarterly DIP Financing Survey (“Though ample liquidity available in the debt capital market has driven down borrowing rates substantially since 2009, pricing for DIP loans has remained relatively steady in a LIBOR spread band of between 500 and 750 bps.”)

Morgan Joseph TriArtisan is an investment bank engaged in providing financial advice, capital raising and private equity investing. The firm’s services include mergers, acquisitions and restructuring advice, in addition to private placements and public offerings of equity and debt.