OREANDA-NEWS. A significant slowdown in leveraged finance issuance has pressured underwriting revenues for large US investment banks, according to Fitch Ratings.

A slew of debt deals have been delayed given challenging market conditions, contributing to what is expected to be weaker overall investment banking results. From a rating perspective, large US investment banks continue to benefit from diversified revenue sources, strong capitalization and solid liquidity that serve to moderate the impact of cyclical capital markets pressure on revenues.

Fitch believes that over the past several months, the repricing of risk has stalled issuance in both the leveraged loan and high yield spaces, underscored by a mere $89 billion of new volume issued in fourth-quarter 2015. The weakness persisted in January and February 2016, with only $44 billion of combined high yield and institutional loan volume. Furthermore, pricing continues to be elevated for issuance with 'B' rating category spreads, currently LIBOR plus 500 basis points in February 2016.

Not surprisingly, some arrangers have had difficulty distributing loans extended prior to the current spread widening. In particular, syndication market conditions for loan exposures to issuers at the lower end of the rating spectrum remain challenging. This creates a negative feedback loop whereby widening spreads give banks pause to underwrite deals for fear of syndication risk, thereby driving spreads wider.

This slowdown in volumes has been particularly difficult for investment banks, which earn substantial origination and distribution fees from this activity. More broadly, this slowdown has also served in part to contribute to challenging earnings performance for investment banks.

For example, Jefferies Group LLC noted in its results for the fiscal first quarter ended Feb. 29 that "leverage lending activity and related liquidity was very muted during the quarter." Jefferies is an investment bank that is not subject to bank regulation and was considered to be in a position to benefit from the dislocation resulting from banks being subject to leveraged lending guidelines. However, Jefferies has been negatively affected by the leveraged lending softness and recently had layoffs in its originations group. As a result, Jefferies's commercial lending joint venture, Jefferies Finance, marked down two loans held for sale by a combined $38 million.

The weakness in both institutional loan and high-yield issuance so far this year, as well as the low amount of loan maturities in 2016, would suggest that 2016 issuance should be down slightly from 2015. This implies that debt underwriting net revenue will continue to be challenging at least through the first half of the year.