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LPC: Refinancing drags fees on US leveraged loans to 4-year low
January 6, 2017 / 3:33 PM / a year ago

LPC: Refinancing drags fees on US leveraged loans to 4-year low

NEW YORK, Jan 6 (Reuters) - Bank earnings from underwriting leveraged loans sank to a four-year low in 2016, as a fourth-quarter burst of refinancing deals that typically pay lower fees than new loans followed three quarters of sluggish business before the U.S. presidential election, according to Freeman Consulting Services.

While total U.S. leveraged lending rose, fees shrank by a similar percentage.

“The market improved steadily throughout the year, and borrowers that got a deal through in Q1 at a higher rate were able to get back into the market and refinance later in the year,” said Jeff Nassof, a director at Freeman Consulting. “That drives up the volume, but fees on refinancing deals tend to be much smaller than for new-money transactions.”

Leveraged loan fees paid to banks fell 12% in 2016 to about $8.1 billion, the lowest since $7.5 billion in 2012, Freeman data shows.

Meanwhile, total leveraged lending rose by almost 12% last year to $875 billion, according to Thomson Reuters LPC. Refinancing accounted for roughly 47% of that issuance.

Leveraged buyouts are expected to accelerate this year, amid investor optimism that the Trump administration will usher in tax cuts and looser regulations, bankers and analysts have said.

Demand is growing for floating-rate assets, which will boost new issuance and thus bank fee income.

Brendan Dillon, co-head of global leveraged finance, said this year will be if not a record year, then a top two or three year for leveraged buyouts.

“First quarter 2017 will be one of our best quarters ever at UBS for leveraged finance,” he said.

Fed policymakers are expecting President-elect Donald Trump’s vows of tax cuts, infrastructure spending and deregulation to pose inflation risk, leading to faster rate increases.

“There are a lot of open regulatory issues with the new administration,” with some seen as favorable for leveraged lending, Nassof said.


Overall U.S. investment banking fees last year dropped the most since the financial crisis, as market volatility sapped merger and acquisition activity.

Fees on business including M&A advisory, equity and bond underwriting as well as syndicated loan arrangement dropped 9% in 2016 to a four-year low of $41.2 billion, after sliding by 2% in the previous year, according to Freeman Consulting. This is the biggest annual slump since a 36% plunge in 2008.

While dealmaking escalated in the fourth quarter, U.S. M&A sank 17% for the full year to $1.7 trillion, Thomson Reuters data shows.

“Deals in 2016 tended to be very large corporate acquisitions, while the middle market has been fairly quiet,” said Nassof. “Smaller deals pay higher fees in percentage terms than mega deals, and we think there’s a good chance the M&A market transitions toward middle-market deals that have a large fee impact.” (Reporting By Lynn Adler; Editing by Christopher Mangham and Michelle Sierra)

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