Despite a moderating deal flow over the past three months, the U.S. leveraged loan market is on a record pace for issuance in 2021 as the third quarter nears an end. Total institutional loan volume in 2021 through Sept. 24 is $472 billion, easily surpassing the prior high for the comparable period, $397 billion in 2017, and within striking distance of the previous full-year record of $503 billion, set that same year.
The advance is broad-based, with many category totals over the first three quarters of 2021 comfortably ahead of prior all-time highs for the first three quarters, such as M&A (both total and sponsored) and dividend recapitalizations.
Total M&A volume of $240 billion is ahead of the previous high of $221 billion, set in 2018, while M&A via private equity sponsors is $181 billion, up from $163 billion, also in 2018. LBO volume is at a post-global financial crisis high for the first through third quarters, but lags the all-time high of $123 billion from 2007.
This wave of issuance has propelled the amount of institutional U.S. leveraged loans outstanding, as measured by the S&P/LSTA Leveraged Loan Index, to a record $1.3 trillion as of Sept. 24. The index has grown for seven consecutive months through that date, by $113 billion, the biggest expansion for any comparable period since February 2019.
Leveraged loan issuance has been buttressed by strong investor demand via a consistent stream of retail cash funneling into the market, with $25.6 billion of net inflows based on Lipper's weekly reporters through Sept. 22 this year, and a heated CLO market that itself has been on a chartbusting pace in 2021.
In the third quarter, the volume of primary CLO issuance reached $43.6 billion (as of Sept. 23), entering record territory. The previous high quarterly tally was in the second quarter this year, when managers printed $43.4 billion in new-issue CLO paper. The July-September CLO volume would be the third consecutive quarter that the market has established a new issuance record, with deal flow also well on pace, at over $126 billion year-to-date, to eclipse the yearly volume record of $128.86 billion in 2018.
Looking at the loan market in the third quarter, total institutional volume was at its lowest level of 2021, at $141 billion, but that is still sizable by historical context. Prior to this year, the last quarter with higher volume was the first quarter of 2017 ($171 billion). The M&A engine has continued to roar, with $82.4 billion of supply launched during the quarter to finance acquisitions and buyouts, the second-highest total since the second quarter of 2018, behind only the $84.2 billion in this year's second quarter.
Singling out LBOs, deal volume fell short of totals from the prior quarter but has remained high, at $40.4 billion, led by Medline's $6 billion U.S. dollar term loan B, and other benchmark offerings from Parexel ($2.7 billion) and Cornerstone OnDemand ($2.1 billion). In addition, private equity-backed companies tapped the loan market for $25.5 billion during the quarter to fuel M&A activity, the most since the second quarter of 2018.
Surging investor demand for leveraged loans kicked opened the door to opportunistic transactions early in 2021 and this door remained wide open throughout the third quarter. While term loan repricing and refinancing activity cooled off from the supercharged levels seen earlier this year (refinancing volume dropped 36% quarter-over-quarter to $26.1 billion), the flow of dividend recapitalizations — which often includes refinancing existing debt — remained strong.
As mentioned, total volume of dividend recapitalizations is already a full-year record, surging to $66.4 billion in the year-to-date. Recaps for private equity-backed borrowers, representing a vast majority of all dividend deals, are already at the full-year record, with more than three months left to go until year-end. As of Sept. 24, sponsored dividend recaps totaled $55.3 billion, exceeding $51.1 billion in all of 2013, the prior high.
Whether for M&A or opportunism, borrowers in the single-B bracket have flooded the market at a record pace, even as clearing levels in the primary continue to bump along historically low levels. Loan issuance from single-B companies hit $342 billion in the nine months of 2021, blowing past the prior apex of $271 billion in 2017, and eclipsing the full-year record of $334 billion, also in 2017.
Issuers with at least one B-minus rating have tallied up $187 billion of loan issuance over the three quarters of 2021, representing 55% of the total single-B bracket issuance, an amount that is more than in any comparable period in history. In the third quarter, issuance from B issuers accounted for 75% of total institutional volume, essentially evenly split between issuers with at least one B- rating and those squarely in the B/B+ realm.
Even amid this flood of activity, the new-issue spread for B-flat issuers fell to L+401 on average in the third quarter, from L+420 in the second quarter, while B-minus spreads were roughly unchanged, at L+437. That widened the gap between the two spread levels to 37 basis points, from 18 bps last quarter, the lowest reading in at least five years. Still, that third-quarter spread differential remains narrow compared to the five-year average of 51 bps.
