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The Deal: Leveraged Loans Are Being Issued Like It's 2007

This is all despite the fact that M&A still hasn't hit its stride.

U.S. M&A totaled $853.7 billion for the first three quarters, which was up 37% over last year, according to Dealogic. This was thanks in large part to Verizon Communication Inc.'s (VZ) $130 billion deal to buy back Vodafone Group's (VOD) part of their JV in Verizon Wireless, as well as the Dell and Heinz LBOs. However, the number of deals dropped 21% year-over-year to 7,117.

"The pace of M&A activity hasn't accelerated to the point that people might have expected, as auction activity remains relatively weak," Ryan says. "In addition, some private equity sponsors appear to be taking a relatively conservative approach on valuations while they wait to see how some of the issues in the macro-economic market play out."

With the right company's story, "there won't be a hard cap within reason on the amount of debt that can be raised as we have seen some large acquisition financings this year," said Ryan.

Still, companies could be borrowing trouble, especially if banks allow leverage to creep back up to higher levels.

At the same time, the latest in leveraged loan flavor has tended toward the covenant-lite, which helps keep the default rate low. As Ryan explains, "If there aren't any financial covenants to breach, companies will have a longer runway to restructure before a refinancing is required."

In the 2013 third quarter, 64% of loans issued were covenant-lite, beating out the prior record of 58% set during the second quarter, according to S&P's LCD.

As long as the default levels remain low, the debt markets should remain very, very happy.

Written by Jonathan Schwarzberg

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