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NEW YORK (Reuters) - U.S. syndicated loan financing of $1.326 trillion in the first nine months of 2016 was 11 percent lower than the same period last year and the lowest since 2012 as M&A activity dropped and opportunistic refinancings prevailed while interest rates stayed low with the U.S. elections pending.
The $372 billion of loans issued in the third quarter was 31 percent below the same time last year and down 38 percent from second quarter volume, according to Thomson Reuters LPC data.
Looming year-end uncertainties including the elections and Federal Reserve policy actions are expected to keep mergers and acquisitions subdued, investors and bankers said. Leveraged buyout business, meanwhile, remains contained by regulations limiting the amount of debt in those deals.
Leveraged lending is down 11 percent in the year to date at around $555 billion, while investment grade lending is off 7 percent at about $580 billion.
A gradual increase is seen for M&A financing, which totals about $320 billion so far this year and is down 20 percent from the same nine months of last year. Third quarter financing to back mergers and acquisitions fell 40 percent from the prior quarter.
The slowly growing U.S. economy argues for expansion via mergers or leveraged buyouts, and software and healthcare remain prime sectors for these deals, investors and bankers said.
“If you don’t have huge actual growth in the economy, M&A and LBOs are a way to create some external rather than organic growth, financed at a pretty cheap level over the next six to 12 months,” said Jean-Philippe Levilain, global head of leveraged loans at AXA Investment Managers.
In the meantime, lower volatility and the Federal Reserve’s September decision to keep interest rates on hold opened the window wide for companies looking to cut borrowing costs, extend maturities and adjust other terms on existing deals with aggressive refinancings.
In keeping with this year’s trend, these issuer friendly transactions accounted for roughly two-thirds of total loan volume.
The quarter’s deal volume was dominated by refinancing while spotted with M&A and leveraged buyouts, but for the first time in several years, escalated after Labor Day and sustained a solid pace throughout September, Levilain said.
“Refinancing is the preferred use of proceeds, but we are seeing a good mix of deals and that’s what we expect for next quarter,” he said.
While supply is lower than a year ago, investors are ready to buy floating-rate loans given the near-term prospects of the second Fed rate hike in a decade while a vast swath of global debt carries negative yields.
The Fed is widely seen hiking rates in December, for the first time in a year.
Globally, negative-yielding government bonds neared $11 trillion in mid-September, Fitch Ratings said last week. Low or negative yields are a plus for higher yielding assets, including U.S. loans.
Three-year leveraged loans yielded an average 5.35 percent in the third quarter, roughly the same as a year earlier though down from the recent peak of 6.53 percent in the first quarter, Thomson Reuters LPC data show.
In one sign of investor appetite, retail accounts have been net buyers of bank loan funds for nine straight weeks. This is the longest running inflow streak in more than two years, according to Lipper data.
Reporting by Lynn Adler; Editing By Tessa Walsh and Michelle Sierra