You may have noticed the US syndicated loan market—once upwardly strong and steady—is trending downward. What’s not entirely clear is why. But one thing is for certain: It’s not all about the current economic climate, recent bank failures, or excessive coverage of bank lending tightening from those recent bank failures. The pandemic and resulting inflation and interest rate hikes aren’t entirely to blame either.
The truth is, the market is in a continuation of a downward trend that started long before these factors came into being.
A look at Bloomberg’s data on syndicated loans reveals that, aside from the post-pandemic bounce-back in 2021, there has been a steady downward trend in market volume for five years.
In nine of the past 10 half-year periods, dating back to 2018, the syndicated loan market has experienced a decrease in overall volume. (The only semiannual increase occurred in H1 2021, after the Covid-19 pandemic-related economic shutdown.)
In fact, if you don’t count H1 and H2 of 2020 (the “pandemic dip,” if you will), H1 2023’s volume of $1.12 trillion was lower than any half-year period going all the way back to H1 2016.
Taking a step back, there was steady growth in overall US syndicated loan volume for almost a decade, from 2009 through H1 2018. During this time, these loans proved to be a reliable source of behemoth-sized capital for creditworthy corporations utilizing credit to expand into new markets, finance new business verticals, refinance existing debt, or meet capital requirements for leveraged buyout transactions.
But in the two years or so leading up to the pandemic, starting with H2 2018, the industry appeared to be on a downward trend, based on Bloomberg data corroborated by the most recent Bloomberg Global Syndicated Loans League Tables (a league table report that also provides comprehensive global data about syndicated loan deal activity).
After the pandemic dip in 2020 and bounce-back in H1 2021, the downward trend resumed, leading right up to the present.
Corporate Bonds, Leveraged Loans
So, what is to blame for this long-term trendline? One theory is that syndicated loan market lenders are spreading the love (and by love, I mean risks; love is risky) of the more speculative transactions with investors in a staple alternative market: high-yield corporate bonds.
In the case of US leveraged loans (that is, a category of syndicated loans considered to be riskier and, therefore, more speculative), total deal volume in H1 2023 ducked lower than any of the previous 10 halves—including any Covid-19 pandemic-induced low periods.
It’s a plausible theory. As the name suggests, high-yield equals high risks—although the data has only recently begun to show the asset class trending upward again; so time will tell if it will reach new levels in the quarters and years to come.
Private Credit
A likelier factor could be the increasingly popular alternative of private credit, which may have gotten endorsement-like boosts from the passing of the 2010 Dodd Frank Act, as it effectively pushed riskier lending outside of the scope of regulated banks.
Private credit has consistently trended upward since at least 2017, based on data published by Preqin Ltd. (somewhat lining up with the 2018 start of the syndicated loan downtrend noted above). However, the challenge with following this trail of breadcrumbs is that private credit is, well, private. It only leaves crumbs (of data), which makes it hard to determine how long it’s been around, how much of the market it’s consuming, and how long it intends to stay around (or will be viable). Private credit is often noted by industry stakeholders as providing more workable, flexible capital and has increasingly drawn in more diverse types of investors, including a campaign encouraging investors toward the asset class.
Silicon Valley Downturn
While private credit has thus far been primarily a middle-market, private company phenomenon, the continued downturn in syndicated loans might have large, public companies looking to it more often as an alternative.
Consider, for example, the 2023 Fenwick-Bloomberg Law SV 150 List, which ranks the 150 largest publicly traded tech and life science firms in Silicon Valley, based on 2022 revenue.
A search of Bloomberg’s data on syndicated loans taken out by the SV 150 found a total of 17 loans completed in the 12-month period ending June 30, totaling $12.6 billion. That’s a big drop from the previous 12-month period, when members of the SV 150 reported 23 loans totaling more than $40 billion.
The 69% decline in total volume for these largest companies was three times as steep as the 23% decline in the technology and health care sectors overall over the same period.
Legal Skill Sets Required
Looking ahead, legal practitioners representing parties in the syndicated loan and high-yield corporate bond practice areas should consider whether the requisite skill set needed to close syndicated loans is similar to those needed to close these less utilized, alternative debt structures.
At least one law firm has publicly shared plans to build out a practice group around private credit lending, and we can expect that more such efforts are already underway.
For private credit, there are at least two different, yet related, phases to consider that might require drawing from unique skill sets for lawyers: forming and closing on the private credit investment fund itself, and making individual loans to portfolio companies (while adhering to any fund formation lending criteria). Will these lawyers be pulled from syndicated loan practice groups or investment fund practice groups? I presume some combination of the two will cover all bases.
Finally, to revisit a question I posed earlier, it may be too soon for any of us to know what’s really to blame for the trend unfolding before us or what’s happening with the US syndicated loan market, especially in the longer term. What I can say is that there will likely always be a demand for the purposes it serves, and by all indications, market participants are courting alternative means to meet their needs.
In other analysis articles covering the Fenwick–Bloomberg Law SV 150 List: Preston Brewer’s July 12 analysis looks at the artificial intelligence risks that companies are disclosing in their SEC filings; Andrew Miller’s July 17 analysis focuses on venture capital and other private equity deals; and Abena Opong-Fosu’s July 20 analysis assesses the latest mergers & acquisitions data.
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