NEWSLETTERS · DEBT DOWNLOAD · JANUARY 25, 2024

Debt Download

Welcome to Debt Download, Goodwin’s monthly newsletter covering what you need
to know in the leveraged finance market. What does 2024 have in store for the debt
markets? Read on to find out.

Note: Some of the links in this newsletter may redirect you to a subscription-only
resource.

In the News
• In the first three weeks of January 2024, the U.S. leveraged loan market saw its highest volume in the past four years, with
$124.5 billion of gross institutional loans, of which more than $69 billion and $34 billion were for repricing and refinancing
transactions, respectively, whereas only 9% of which were for buyouts, acquisitions and other non-refinancing purposes (the
lowest share since the Great Recession). This is consistent with the trends toward the end of last year, when repricings to
lower spreads and amend-and-extend transactions dominated the institutional credit markets, with $81.3 billion of repricing
transactions, 54% of which occurred during the last 3 months of 2023, and $175.9 billion of amend-and-extend transactions in
2023 ($82.4 billion of which was for institutional loans), higher than the previous record of $110.1 billion in 2021.
• The leveraged buy-out (LBO) market in 2023 was down about 25% globally compared to prior years for a variety of reasons,
including higher interest rates, valuation disputes between buyers and sellers, economic uncertainty and, in the case of
broadly syndicated loans (BSLs), refinancings of outstanding BSLs with private credit or high-yield bonds. The volume of
LBOs financed with BSLs in 2023 was down to $31.8 billion from the high in 2021 of $151.5 billion, and total leveraged capital
market activity for 2023 was $1.25 trillion, down from $1.45 trillion in 2022. The U.S. syndicated middle market loan volume in
the last quarter of 2023 totaled $24.6 billion, the lowest quarterly level since the third quarter of 2020.
• The average pro forma adjusted total debt multiple for LBOs in 2023 was 4.2x, down from 5.9x in 2022. Pricing flex for BSLs
favored borrowers in December, with 25 cuts and 2 increases compared to 18 cuts and 5 increases in November. Average
all-in clearing spreads for single-B new issuances decreased in December to S+436 from S+458 in November (with the
average for 2023 down to S+515 from S+596 in 2022, although the average all-in yield of LBO loans in 2023 was up to 10.5%
compared to 7% in 2022). Issuer defaults were up to 2.05% for December from 1.94% in November (not including debt
exchanges).
• Although increased interest rates in 2023 tamped down LBO activity, increased rates were a boon for lenders, in particular
private equity funds and business development corporations (BDCs) that have private credit businesses, with private credit
loan yields in excess of 10%. As a result, BDCs have been able to issue higher dividends to their shareholders. Blue Owl
predicts that yields on private credit loans in 2024 will be “high-single to low-double digit,” versus “mid-to-high single digit”
 yields in the BSL market. These higher yields continue to lure more banks to the lucrative $1.5 trillion private credit market,
with Wells Fargo, Deutsche Bank, Société Générale, Rabobank and Citigroup all launching private credit initiatives in the past
6 months. On the other hand, Goldman Sachs, Barclays and Citigroup are looking to refinance expensive 2022-vintage
private credit loans with syndicated debt, touting that syndicated debt now is 75 basis points cheaper than private credit loans
and does not contain onerous financial covenants.
• As we noted in the December edition of Debt Download, notwithstanding the optimism in the loan market for 2024, loan
default rates continue to rise, with Fitch Ratings reporting leveraged loan issuer defaults up to 3.04% for 2023 from 1.60% for
2022, and predicting default rates of 3.5%-4% in 2024 as a result of issuers’ inability to offset higher interest expense through
EBITDA growth. Bloomberg analysts estimate $24.4 billion of non-performing loans at JPMorgan Chase Bank, Bank of
America, Wells Fargo and Citigroup for the last three months of 2023, up $6 billion since the end of 2022, which will result in a
negative impact on earnings for these U.S. banks. In addition, corporate bankruptcies are on the rise, as noted in this S&P
report, which highlights that 2023 saw the most corporate bankruptcy filings since 2010, up 80% from 2022. According to
Reorg, bankruptcy cases for companies in the consumer discretionary and healthcare sectors with liabilities in excess of $100
million were the busiest for 2023, comprising 21% and 20%, respectively, of the total cases. Healthcare companies in
particular are struggling with rising costs, falling patient numbers and tougher regulation.

Goodwin Insights – Crystal Ball Predictions

For the first edition of Debt Download in 2024, we wanted to highlight the Goodwin U.S. Debt Finance team’s predictions for the
coming year in leveraged finance. Here is a list of what we are expecting:

• Private credit will continue to finance mega-leveraged buyouts but will see an increase in competition from the broadly
syndicated market, which has recently started gaining momentum in pulling back issuers that were trending toward private
credit deals. In order to entice issuers, banks and other arrangers of BSLs will agree to aggressive documentation terms and
other concessions, which will in turn lead to loosening of terms by private credit lenders. To take advantage of this dynamic,
sponsors will run dual private credit vs. BSL processes to obtain the best possible loan terms. As part of the mega-private
credit deals, sponsors will continue to fill the deals with larger groups of lenders than historically. This will allow sponsors to
further expand their relationships in the private credit space with receptive private credit lenders sitting on an excess of dry
powder and looking to gain market share as the market heats up.
• With sponsors and direct lenders both having large amounts of dry powder ready to be deployed, and with sponsors
motivated to cash out portfolio company investments in older funds to return capital to investors after a period of limited
distributions, we expect there will be an uptick in sponsor-to-sponsor LBOs by the middle of 2024. In addition, to help provide
for alternative ways to provide distributions to investors, sponsors will continue to look more to NAV loan facilities to bridge the
gap.
• Liability management transactions will continue to pervade the loan market for distressed or near-distressed issuers in 2024,
as more transaction structures are vetted through litigation and court proceedings and as lenders become more eager to put
to work large amounts of dry powder, particularly in instances where they can improve their existing loan position in the capital
stack.
• If the bond trading prognosticators are correct that the Federal Reserve will meaningfully rein in interest rates by the second
quarter of 2024, that will help unlock some of the hundreds of billions of dollars in dry powder currently held by sponsors and
private credit lenders alike as M&A buyers and sellers are more likely to transact.
• Sponsors will continue to focus on getting short term relief from cash interest payments in new senior secured credit facilities
by looking to pay a portion of interest in-kind over the next year or two as they wait for interest rates to start to drop.
• As we move further into 2024, some credit facilities entered into during the boom times of 2021/2022 will inch closer to their
maturity. In order to avoid hitting the maturity wall, borrowers will continue seeking amend & extend transactions as a cheaper
way to extend loan maturities than full refinancings. This will let sponsors bide their time to take advantage of declining
interest rates.
• Sponsors will ride out the latest downturn by continuing to add loan “portability” provisions in debt refinancings for existing
portfolio companies that they have held for a longer period of time in hopes of enticing potential buyers with newly negotiated
credit facilities as valuations start to increase again. In connection with such refinancings, sponsors will continue to consider
private credit to replace existing BSLs or consider the dual-track approach mentioned above to obtain the best possible loan
terms, especially in a deal where they are looking to add portability and entice potential buyers when they go to market to sell.

In Case You Missed It – Check out these recent Goodwin publications:

2024 HSR Thresholds Announced: $119.5 million; Delaware Personal Data Privacy Act: What Businesses Need to Know; FAQs
About US Bank Failure; New IRS and FinCEN Reporting Requirements for Businesses that Accept Payments in Digital Assets;
FinCEN Issues Beneficial Ownership Information Access Rule; Bank Regulators Issue Interagency Statement.

For inquiries regarding Goodwin’s Debt Download or our Debt Finance practice, please contact Dylan S. Brown, Nikolaus J.
Caro, and Robert J. Stein.

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CONTACTS

Dylan S. Brown Nikolaus J. Caro

Partner Partner

dylanbrown@goodwinlaw.com ncaro@goodwinlaw.com
San Francisco | +1 415 733 6055 New York | +1 212 459 7079

Robert J. Stein
Partner

robertstein@goodwinlaw.com
New York | +1 212 459 7150