(Bloomberg) -- Refinancing, dealmaking and liquidity raising are expected to carry the US blue-chip corporate loan market in 2023, following this year’s decline from a record peak.

Investment-grade companies raised about $1.2 trillion in revolving credit facilities, term loans, and other syndicated loans through Dec. 16, according to Bloomberg league table data. That’s down about 14% from last year’s record high of $1.4 trillion. 

“We are optimistic that issuance volume will normalize next year to be consistent with volumes we have this year, or potentially a little higher if there is pickup in [merger and acquisition] financing,” Peter Hall, head of investment-grade loan syndications at Bank of America Corp., said in an interview. “While issuance is down this year, we’re down off of a very high number,” he added.

High-grade loan issuance has averaged $1.1 trillion over the last five years. It jumped in 2021 when companies rushed to fund deals that got delayed by pandemic shutdowns in 2020. 

The pipeline for refinancing — a major driver of volume — is “healthy” for next year, according to Hall. Much of it will be driven by companies rushing to meet a mid-year deadline to transition existing loans to the Secured Overnight Financing Rate, from the longstanding London interbank offered rate benchmark.

Banks and companies have already been transitioning to SOFR in several ways. While some have simply amended documentation to switch to the new benchmark, others are simultaneously extending maturities, increasing outstanding amounts or adding new loans.

Much of the Libor-SOFR related refinancing will come in the first quarter of 2023, according to Susan Olsen, head of North America investment-grade loans at Citigroup Inc. She added that a lot of the transition has already been done.

Another big contributor to investment-grade loan issuance is M&A, which fell by more than 36% this year — according to Bloomberg league table data — as rising rates kept many potential acquirors on the sidelines. Those that did borrow to fund deals — this year included a $28.5 billion bridge loan to help fund Amgen Inc.’s purchase of Horizon Therapeutics Plc and Broadcom Inc.’s $32 billion of loans for its purchase of VMware Inc. — were well-received in the loan market.

Read more: Dealmaking Drops by a Third as Choppy Markets Chill Merger Fever

Next year, banks will have to be more selective of who they lend to as capital requirements reinforced by stress tests earlier this year put a focus on returns, Olsen said. “You have to really make sure that for the capital you’re committing, the returns are going to be commensurate,” she added. That shift in banks’ behavior may force companies to structure deals differently.

Term Loan Boost

As banks and companies look at how to structure deals for M&A they may also consider term loans, a structure that was used in more ways than usual by high-grade companies this year. Usually, borrowers get a bridge loan which is later replaced by permanent financing, typically in the form of investment grade bonds. 

A little over $250 billion of high-grade term loans were sold this year, according to Bloomberg league table data, a lower amount than in 2021, even after a surge in the second half. That included Oracle Corp. which used a $15.7 billion bridge loan to fund its purchase of Cerner Corp, then issued a $4.4 billion term loan to help sidestep volatility in the bond market.

“There were a lot of term loan asks to put in place facilities that would have normally gone to the bond market which could potentially be refinanced in a year or two,” Hall said.

Companies seeking to raise liquidity amid growing uncertainty and volatility also contributed to the rise in term loans. Another choppy year is expected in 2023, boosting that demand. 

“There is a lot of uncertainty on the horizon and the prepay ability of a loan is a pretty useful tool going into uncertain circumstances,” said Matt Walters, head of investment grade loan capital markets at Wells Fargo & Co., in an interview. That’s driven a lot borrowers to lean on the loan market to provide interim financing, he added.

“They can take a deep breath, see what happens in 2023 and then a decision on their capital structure and whether they want that debt to be interim or permanent,” said Walters.

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