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Q2 2023 Positive Signs Emerge in theLeveraged Finance Market but aResurgence Remains Elusive In This Report Analysis of Q2 U.S. InstitutionalLoan Volume Leveraged Finance Highlights, Analysis, and Results FromWilliam Blair’s Quarterly LeveragedFinance Lender Survey Positive Signs Emerge in the Leveraged FinanceMarket but a Resurgence Remains Elusive The U.S. leveraged loanmarket appears to havestabilized in Q2 but it’stoo early to tell if aresurgence is imminent. LTM highs for lenders providingconcessions overall, for tightening offees and spreads, and for giving creditfor certain EBITDA adjustments.Further, pricing relief is expected tocontinue as 36% of survey respondentsexpect their pricing to modestlydecline over the remainder of 2023. Sustained Elevated Interest RatesBegin to Weigh on Borrowers Over the past year, the Fed raisedinterest rates at a pace not seen inmore than three decades. This resultedin a sustained and significantlyelevated Secured Overnight FinancingRate (SOFR) — the variable base ratefor most middle-market loans. Surveyresults indicated that borrowers arebeginning to feel the impact on theirability to service debt obligations asthe higher interest burden begins toroll into LTM performance. For Q2,45% of respondents indicated thatthey are seeing higher rates of defaultthan what was seen during theprevious six months. This is in line with what the WilliamBlair Leveraged Finance Group hasexperienced across live debt advisoryengagements as well as anecdotallyfrom conversations with directlenders. Regular way pricing hasdeclined approximately 50 basispoints, as lenders have become morecomfortable investing in the currentfinancing environment and look todeploy excess dry powder. Surveyresults supported this sentiment asthe level of lender aggressivenesstoward new opportunities increasedto an LTM high and was on par withpre-COVID lending appetite. U.S. institutional leveraged loanvolume remained flat in the secondquarter, reaching a total of $50.5billion. Despite this positive sign,year-to-date volume of 102.9 billionrepresented the lowest level ofactivity since 2010. While M&Aactivity generally remained anemicduring the quarter, loan volume tiedto M&A did increase quarter-over-quarter to $13.9 billion, representingthe first such quarterly improvementin almost two years. Refinancing loanvolume remained relatively stableduring Q2, reaching $36.5 billion,and accounted for more than 60% oftotal institutional loan volume. As discussed in our June 2023 FrontLine Insights Article “The DelayedImpact of Higher Rates and theRe-Emergence of PIK,” and furtherattested to in this quarter’s lendersurvey, lenders expect default rates Pricing Begins to Tighten asLender Aggressiveness(Cautiously) Returns William Blair Leveraged Lending Index Holds Steady Each quarter we ask middle-market lenders to rate overall conditions in theleveraged finance market on a scale of 1 to 5, with 5 being the most borrower-friendly conceivable. The index remained unchanged in Q2 indicating possiblestabilization within the financing markets. William Blair’s Leveraged LendingIndex remained steady in the secondquarter at 2.4 (scale of 1 to 5, with5 being the most borrower-friendly).Although the index remainedunchanged and points to a moreneutral lending environment,respondents to William Blair’sQ2 2023 Leveraged Finance Surveyindicated an increased willingness tomake borrower-friendly concessionsto win deals as M&A volume remainedsubdued and the lack of quality creditsin the market spurred heightenedcompetition. Survey results revealed to further increase over the latter partof the year, with more than 80% ofrespondents expecting an uptick indefaults over the next six months.Lenders expect continued pressurefrom materially higher interest ratesand the related impacts on liquidityto be the biggest market factor inthe near term. Many borrowers,particularly those that put creditfacilities in place prior to rates risingin mid-2022, still have not experiencedthe full-year impact of cumulativerate increases on earnings. Toward theend of Q3 the market will have betterinsight into the overall impact of5.0%+ SOFR rates on borrowers’cash flow. opportunities over the past quarter. Asa result, the trend of the private creditmarket taking share from thesyndicated loan market continued inQ2. Direct lenders’ broad investmentmandates, flexible structures anddocumentation, and funding certaintyhave enabled them to become thepreferred financing option forsponsors. During the first half of 2023,private credit providers financed 9xmore LBOs than what was completedthrough the syndicated market, with atotal of 108 direct deals compared tojust 12 on the syndicated side. To learn more about these and othertrends shaping the leveraged financemarket, please don’t hesitate tocontact us. Lender Hold Sizes Constrained Another dynamic currently impactingthe leveraged loan market, particularlyon the private side, is decreased lenderhold