With the likelihood of a recession hitting soon and debt markets drying up, it seems that the deal flow in LevFin is pretty dead.
I got an offer to join a LevFin team in August/September but due to the above, I am not sure if I should aim for another team? Do you guys think the deal flow will be back later in 2022 or early 2023?
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levfin dealflow rn is literally zero. it's just the market. even in a recession the loan market will stabilize. that being said we won't see 2021-esque issuance for a long time, if ever
“If ever” LMAO
yes, seriously
Where do sponsors go to lend money then if not the lev fin teams?
Lot of deals are going the direct lender route vs syndicated deal route this year
Like you’ve mentioned it’s not a great time for levfin…probably wouldn’t join unless it’s a considerable upgrade compared to your current gig. Everyone has their own outlook on the macro environment but I’d be skeptical of issuance reaching even pre-pandemic value/volume anytime soon.
The sector I am a part of has seen LevFin deal flow contract from ~60bil last year to around $9bil year to date. Even if we annualized that - it'll be the lowest in the last 8 years.
Why has activity slowed so much
secondary loan market is trading at around 93. you can't issue new paper at 99 when investors can buy an equal risk credit for 93. therefore you have to issue new credits at an equivalent all in yield, which right now is really bad. this week the secondary market improved about 100 bps so there's been a tiny bit of improvement after last week's bottom
Like Analyst 2 mentioned, OIDs have gotten larger, I agree that the availability of other credits plays a role in this but in a world of rising rates and inflation you have the problem of banks committing to financing at x% (they will try to syndicate this debt at <x%) but debt investors are looking for higher yield (than what the bank would ideally be able to syndicate at). As a result, the bank (which has little incentive to hold this paper both from a risk and regulatory view) will sell this paper at a discount. As such, some banks have lost hundreds of millions in the process of underwriting LBO debt this year.
Curious which sector
Spreads on BB lower ratings have widened significantly, most companies used the ultra low interest rates and high market appetite to refi in the past couple of years. Plus some other factors which I don’t yet have the knowledge to tell you
So, there is no chance things will start to recover later this year?
things should normalize a little
Things should recover a bit relatively soon.
Would lev fin still be a good place to intern in 2023? What about return rates and future layoffs?
While LBO financings are slowing down, LevFin will still see some interesting deal flow with hairier refinancings, liability management advisory, A&Es / consent solicitations, which I find to be more interesting transactions than an underwrite
Its a cyclical business. If you are interested in levfin, join and take the down time to learn the business. If you are not interested then don't join. When conditions are more favorable for sponsors to ramp up LBOs, recaps and such - it'll be fine. It's not like this is going to last for too long
Eh its not quite that there are no opportunities and DCM deal flow, for sure less than the boom period, but a lot of BB have debt on their books that they need to and are struggling to clear. A lot of hung syndications and bank derisking, Private credit deal flow has been pretty solid the last few weeks to pick up the slack.
I work in LevFin and indeed with spreads widening all of the banks have postponed launching as going to market now would most likely result in a pricing well outside flex and the bank's fees (i.e. banks would be losing a lot of money). If you look at the volume of underwritten (I am talking about EMEA) transactions that are sitting on the bank's underwrite books (roughly 60bn), a pressure is building up that will force banks to go to market at some point. Spreads have been tightening last week, and if that continues we could see the floodgates opening in September and October. To OP, if you like to work in LevFin, I wouldn't worry too much about a lack of dealflow. I think September might just be a crazy busy month (not sure why you would start in August in the middle of holidays). Let me know if you have any questions.
Thank you for your great response!
The bank has different teams covering HY bonds/loans and another covering LBOs. Do you think both would see this kind of recovery in September or just the loans/bonds team?
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