COMPANIES have issued a record $986 billion of debt in the U.S. leveraged loan market this year, mainly to reduce interest costs on existing debt.

That figure surpassed 2017, the busiest year for new issuance, according to data compiled by Bloomberg going back to 2013. Most of this year’s volume came from companies refinancing their current bonds or securing lower margins through a revaluation.

The type of deals being done highlight a painful market dynamic for investors: too much demand for leveraged loans and not enough supply of new debt for uses such as financing buyouts.

Issuers are able to reduce their margins by a quarter to three-quarters of a percentage point, with lenders more willing to accept this reduction given the lack of acquisition financing opportunities. Those who do not accept such deals risk being pushed aside while others eager to put their money to good use join in.

For these investors, it can be difficult to replace an upgraded loan in their portfolio with one offering a decent yield and sufficient credit quality.

“There’s an element of frustration of ‘hasn’t this just been revalued?'” said Grant Nachman, founder and chief investment officer of Shorecliff Asset Management. “If issuers take it too seriously, you’ll have to work even harder to find something to replace it with. There’s really no substitute for hard work.

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Borrowers, on the other hand, are taking advantage of healthy trading on the secondary market – which has recovered to 97 cents per US dollar – to obtain better conditions on their loans.

Software company UKG revalued a $6.3 billion loan on Thursday, October 24, the largest transaction of this type of the year. Market-making firm Citadel Securities just completed a $4 billion repricing. Fertitta Entertainment, the holding company for American billionaire Tilman Fertitta’s businesses, has begun syndicating a $3.6 billion deal.

Demand was driven by a surge in creation of collateralized loan bonds, the biggest buyers of leveraged loans. The issuance of CLOs, which repackage loans into bonds, is up 69 percent on an annual basis.

Despite the high volume of new issuance, the focus on refinancings and revaluations has left the size of the US leveraged loan market unchanged at around US$1.4 trillion, according to the Morningstar LSTA US Leveraged Index Loan.

This year, “new money” deals like buyout financing – which increase the size of the leveraged loan market – accounted for only about 10 percent of total volume.

This is changing. In September, almost 20 percent of issuance volume came from acquisition-related transactions. The momentum continued this month. A US$3.3 billion leveraged loan is currently being syndicated to support the buyout of R1 RCM, which assists hospitals with their billing and payment functions.

More could happen in 2025, as the Federal Reserve is expected to continue lowering interest rates, which could spur acquisition activity.

“We’re not really convinced of a big increase in the supply of leveraged buyouts over the rest of the year, particularly in the run-up to the election,” said Corry Short, credit strategist at Barclays. “But could we see this pick up again in 2025? Of course.” BLOOMBERG