Leverage Multiples Remain Elevated as Loan Volumes Begin to Decline
Capstone Partners released its Middle Market Leveraged Finance 2022 Report, providing key statistics and analysis on middle market credit dynamics, loan volumes, leverage multiples, and pricing trends.
Q1 2022 middle market (MM) loan volume decreased substantially compared to Q4 2021 as the feverish merger and acquisition (M&A) pace of 2021 subsided. M&A drove ~31% of overall loan volume in Q4 2021 compared to ~5% in Q1 2022. Leveraged buyout (~40% of overall volume) activity led the way in Q1 2022, supported by elevated private equity dry powder, followed by strong refinancing activity (~35%) as rates remained relatively low, particularly toward the beginning of the quarter. This trend is expected to continue reversing in the second half of the year as the Fed tightens monetary policy and raises rates. The remaining loan volume for the quarter consisted of various other corporate purposes (~25%).
Average LIBOR spreads widened to 600 basis points (bps), their highest level in the past decade, as increasing Fed benchmark rates and general economic uncertainty led to a recalibration of perceived credit risk in the broader market. Capstone expects additional rate hikes to lead to continued yield expansion in the second half of 2022 before settling at heightened levels in early 2023.
Despite recent trends in the public markets, borrower-friendly conditions persist within the Direct Lending market due to a continued supply and demand imbalance and a lack of quality deal flow in the first half of 2022. While increased competition among lenders has sustained market strength, recent data points to the potential of a recession as soon as the end of 2022 as continued inflation, a historically tight labor market, and supply chain challenges permeate the overall economy and require continued action from the Fed in response.
Download our Middle Market Leveraged Finance 2022 Report for more key insights, including:
- Why leverage multiples have remained elevated amid broader macroeconomic uncertainty.
- Data on debt capital inflow for the quarter, including insight on what will drive fundraising moving forward.
- An overview of recent trends observed in middle market Credit Agreement terms.
- Driving factors behind the resiliency of private credit.
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