2024 Leveraged Finance Outlook

Early indicators support that 2024 could be a strong year for leveraged finance, with signs that the market is returning to life following 2023.

High levels of volatility in the credit market throughout 2023, tied to inflationary pressure, rising rates, and ongoing geopolitical tension, led to limited primary market issuances last year. As a result, new leveraged buyout supply dropped to US$43 billion, a 13-year low. M&A volume also stagnated, seeing activity dip to around US$72 billion, its lowest level since 2010.¹

Based on the improved market tone in recent weeks, there is reason to be cautiously optimistic that 2024 is unlikely to see a repeat of these decade lows. Already, there has been a slight pick-up in activity led predominantly by opportunistic refinancing and repricing transactions.

That’s not the only sign of a rebound. Refinance activity has risen to approximately US$136 billion as of December 31, 2023, the fourth highest total on record, from US$102 billion in 2022, as issuers focused on extending maturities. This spike in opportunistic transactions follows a healthy rally in the secondary loan market that began in November 2023, spurred by cooling inflation and expectations that the U.S. Federal Reserve will pivot to rate cuts in the new year.

While economists and traders continue to vacillate almost daily on how fast and steep those cuts might be, we think the Fed will adopt a cautious go-slow approach. BMO economists forecast rate cuts will begin by the start of the second half of 2024.

As rates improve and spreads tighten, we expect the financing environment to improve significantly in 2024. BMO Economics forecasts that come July, the Fed will announce the first of three 25 bps rate cuts expected before the end of the year.

The 10-year Treasury is expected to continue its downward trajectory throughout 2024, slipping below the current 4% yield in early January to settle somewhere in the mid-to-high 3% range by year-end. The Secured Overnight Financing Rate is projected to shed 70 bps in the second half of 2024, lowering borrowing costs for floating-rate instruments.²

Wall Street estimates project a rebound in 2024 with institutional term loan B (TLB) and bond issuance volumes elevating to US$375 billion and US$225 billion, respectively, up considerably from the dearth of issuances experienced in 2022 and 2023. With the presidential elections in 2024, issuers will likely take advantage of the early window to avoid potential volatility tied to uncertainty around election outcomes in the back half of the year.

Overall, the conditions for a rebound in 2024 are expected to strengthen as the year progresses. The only real question that remains is who will seize on this improving market first?

_{1 Pitchbook | LCD, US Credit Markets Quarterly Wrap, Q4 2023}

_{2 BMO Economics, Rates Scenario for December 15, 2023}