U.S. Bank describes the speedy recovery of revolving credit facility issuance.
Talk about a rebound: In the depths of the Covid-19 pandemic, the value of bank loan facilities put in place by corporates tanked by more than 50% to about $200 billion. In the first quarter, it topped $500 billion, above the level reached a year prior (see chart), due in part to plummeting pricing.
- This was among the key insights from a loan market update by Jeff Stuart, EVP and head of capital markets at U.S. Bank at a recent NeuGroup for Mid-Cap Treasurers meeting.
- The loan market’s U-shaped recovery shows no signs of slowing. “I think we’re seeing a pretty amazing recovery in this market, and I think we’re going to see opportunities you won’t see for a while,” Mr. Stuart said.
Positive pricing. Mr. Stuart said the return of issuance levels is “nothing short of extraordinary. It is an amazing recovery over a very short period of time.”
- “The part that’s really amazing about the past 12 months is the strength of the market through the crisis in terms of new money for M&A and expansion,” he said. That’s shown by the yellow and green bars in the chart above.
- Pricing, after spiking during the pandemic, has returned to pre-Covid levels (see charts below).
- “It’s almost like it never even happened, and in some cases pricing is even more aggressive,” he said. “Borrowers are testing new lows in pricing all the time. I think we might be there, but this is a far cry from where we were six months ago.”
- In addition, he said, though three- and five-year revolvers were essentially abandoned during the depths of the pandemic in favor of temporary one-year facilities, he has seen one-year revolvers “fall off” and three- and five-year volume return close to normal.
Relief and reaction. In response to the market’s recovery, one member said, “I don’t think any of us sitting here this time last year would’ve really thought that, but I think that’s really good information for all of us.”
- The member said companies are now ready to explore going back into the market, and her colleagues are “talking to our bankers about utilizing the various options out there.”
- Mr. Stuart said, “Whether you’re thinking about a new facility or you’re thinking about renewing, this is an opportune time. Banks are really looking to recover asset growth.
- “Whether you’re a leveraged borrower or an investment-grade borrower, now is a great time to be thinking about taking advantage of this strong bank market and raise some dry powder.”
Accordion or start over? One member whose company did not see a need to take any risk management actions during the pandemic is now looking to take advantage of the favorable pricing. But she wonders if the right move is through an accordion, adjusting the company’s current long-term facilities.
- “We’re looking at more offensive plays, we have a pretty substantial accordion,” she said. “I’m curious if companies are going out and exercising those accordion options to increase committed dry powder.”
- Mr. Stuart responded that, if corporates have the time, a full refinancing may be the better option. “What we’re seeing is not necessarily the use of accordions, but full refinancings at better terms,” he said.
- “Borrowers are actually looking to reduce pricing, and in many cases redoing their deal as an amend-and-extend or as an upsize.”
- Another member noted that, though this is an attractive option, it may not work if companies have an impending need for liquidity. “If you need to tap an accordion, you could probably do it in 30 days or less,” he said. “But for a refi, it’s going to take a lot longer. A lot of times you don’t have the luxury of redoing it.”
