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NEW YORK, March 31 (Reuters) - First quarter US syndicated lending of US$535bn was 50% higher than the first three months of last year as companies raced to refinance existing loans to lock in low borrowing costs before the Federal Reserve raises interest rates.
Refinancing loans totalled US$409bn and accounted for three quarters of all US first quarter lending as new money loans and, notably, mergers and acquisitions (M&A) deals remained sparse with companies awaiting specific details of President Trump’s numerous tax and trade policy overhaul plans.
Overall volume was 8% lower than the US$583bn issued in the fourth quarter of last year, although the share of refinancing activity accelerated significantly.
Leveraged lending spiked on the refinancing spree, while investment-grade activity sank to a four-year quarterly low on the dearth of M&A deals.
Leveraged lending dominated first-quarter issuance, at US$345bn, up from US$133bn in the same quarter a year ago and the largest quarterly amount since the second quarter of 2013.
In contrast, investment-grade lending of US$140bn in the first three months of this year was below US$164bn in the same period last year and the smallest quarterly tally in four years.
The US$11bn issued for investment-grade M&A was the lowest since the fourth quarter of 2012, and a far cry from the US$36bn in the same quarter last year as uncertainty and high valuations slammed the pace of transactions.
Investor demand for floating-rate assets remains robust broadly, empowering leveraged companies to return to the market to slice average yields to 13-year lows.
The administration’s failure to repeal and replace the Affordable Care Act, commonly known as Obamacare, late in the quarter raises concerns about other Trump agendas, and helped to keep new-money lending subdued, bankers and investors said, adding that they expect these conditions to persist.
“It doesn’t feel like volume is likely to change in a material way,” a senior banker said. “The loan market has largely been immune, but it’s been less than two weeks since Obamacare didn’t get repealed,” he said. “That is the new aspect, the uncertainty around tax policy is still out there but there’s just more skepticism now about the ability to get some of it passed.”
While the credit markets were robust in the first quarter and liquidity was abundant as strong inflows continued, mounting questions about Trump’s policies remain unanswered and the markets have been marking time while awaiting details.
Retail investors have poured money into bank loan funds every week except for one since early August 2016, creating a positive market tone. Bank loan funds have pulled in almost US$12bn so far this year, lifting total inflows during this eight-month streak to US$22.5bn, according to Thomson Reuters Lipper.
“For the most part, the first quarter was the sentiment driven quarter, as no one expected that we would see new policies implemented that fast,” said Jonathan DeSimone, managing director at Bain Capital Credit.
Loan bankers and investors said they are now looking for concrete developments on issues including US tax and trade policies, filling the US Supreme Court vacancy and overseas elections.
“The rally that we’ve had since (US) Election Day was anticipating improving fundamentals,” DeSimone said. “While we have solid fundamentals for the most part, the second quarter will give us a little better sense of how and how much are we going to build on those fundamentals for the rest of the year.”
Last year, there was a fourth-quarter rush of corporate refinancing and buyouts, as markets rallied on the prospects of looser financial regulation under the Trump administration. After that burst of activity, total US syndicated lending reached US$1.99trln, matching 2015 volume.
Demand for loans by quarter’s end was unrelenting, as investors look for exposure to assets offering yields that could float upward along with interest rates.
The Federal Reserve raised rates in March, quickly on the heels of its December 2016 hike, and is signalling two more increases this year.
Issuance of Collateralized Loan Obligation (CLO) funds, the biggest buyers of leveraged loans, topped US$16bn in the first quarter, double the amount issued at the same time last year, LPC data showed. (Reporting by Lynn Adler; Editing by Tessa Walsh)