The European leveraged finance markets have held up extremely well since the shock of the U.K. electorate’s vote to leave the EU, according to a report published on Monday by S&P Global Ratings entitled ‘Borrower-Friendly Credit Conditions Endure As The European Leveraged Finance Market Shrugs Off Brexit Uncertainty’.
The high-yield bond market has come back to life after a three-week closure due to the referendum, says S&P. Meanwhile, the result of the Brexit vote barely disrupted the leveraged loan market, and the shortage of new issuance so far in 2016 is even giving some private equity sponsors an opportunity to take dividends, S&P adds.
S&P says much of the resilience in the capital markets can be attributed to stimulus measures such as the European Central Bank’s (ECB) Corporate Sector Purchase Programme (CSPP), and will be aided further by the recently announced corporate bond asset purchase scheme (CBPS) from the Bank of England.
Credit conditions for borrowers became much friendlier in the second quarter of 2016, with an uptick in loan repricing transactions, according to S&P, and the agency expects the European leveraged finance loan and bond markets to remain favourable for borrowers since the need for new funding — driven by mergers and acquisitions (M&A) activity — remains lower than investor demand. This is largely the result of trade buyers continuing to dominate the M&A playing field, making it tough for private equity sponsors to compete with them on valuations and thereby reducing the need for new finance, the report adds.
S&P goes on to say that while borrowers have taken this opportunity to refinance expensive subordinated debt with cheaper senior secured issuance, the result has been an increase in the amount of senior leverage in loan-funded transactions. This move is reflected in the reduction S&P has observed in the percentage of deals with ‘6’ recovery ratings and an increase in those with ‘2’, ‘3’, and ‘4’ recovery ratings this year.
Improvements in borrowing conditions could result in a new wave of refinancings, repricings, and maturity extensions, but this could also enable private equity sponsors to achieve less-stringent transaction terms, S&P warns. Companies’ leverage could also increase, S&P says, and although overall debt-to-EBITDA multiples haven’t risen in 2016, senior leverage has continued to climb to its highest level since 2007.
However, rather than the borrower-friendly conditions extending to companies further down the credit scale, S&P predicts investors will remain focused on issuers’ credit quality, and will continue to push back selectively on terms they deem too generous or risky.
The report is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280, or sending an e-mail to [email protected]. — Luke Millar
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