May 2013 European Leveraged Loan Market Analysis
An overview of the past month:
- Loan issuance was €6.7 billion in April 2013, while high yield issuance was €6.5 billion.
- According to JP Morgan HY research: estimated inflows into European HY funds was €543 million for April. This brings year-to-date inflows at €2.9 billion.
- Secondary markets were up, loan markets went up 72 bps points to finish the month at 100.58 while high yield markets were up 206 bps to finish the month at 104.63.
- The S&P European Leveraged Loan Index (ELLI) finished the month up 0.88%.
- Default rates stayed level.
Focusing on the secondary loan market, this chart details the average price of LCD’s European Loan flow name composite – a measure of the 12 largest, most liquid loans (consisting of 10 issuers) – since 2002.
Secondary loan prices rose 72 bps to finish the month at 100.58. The increase brings the average flow names up to a fresh peak since the beginning of July 2007. Since bottoming out at 60.23 at the end of 2008, the average has now recovered to pre-crisis levels, having added more than 40 points over the last 52 months. The current bid is now 324 bps higher than the final reading of 2012.
This next chart details the average price LCD’S European High Yield Flow name composite – a measure of the 12 most liquid high yield issues – since the beginning of the year 2010.
The high yield market finished the month at up 206 bps at 104.63, just 3 basis points shy of the 2013 high of 104.66 . The average bid is now 167 bps higher in the year to date, having ended 2012 at 102.96.
This chart details the monthly return of the ELLI, a broad measure of European loan market returns that LCD calculates. All returns are ex-currency unless otherwise stated.
The European loan market had a positive return of 0.88% for the month of April (for the week ending May 2nd), down from the 0.91% seen in March . This brings the year-to-date return to 3.50% versus 5.19% for the same period last year.
Now we turn from the secondary to the primary. This graph details new-issue volume for both leveraged loans and high-yield bonds.
April’s leveraged loan new-issue launch pad remained very similar to the prior month’s, consisting of a wave of opportunistic transactions with a tiny dash of buyouts. Out of the €6.7 billion total volume for the month, €5.7 billion came from refinancings, led by the jumbo €2.7 billion pro rata facilities for Schaeffler, and the €1.5 billion TLH and TLE-1 for Kabel Deutschland. April’s high-yield bond tally reached €6.5 billion, falling a tad short of the roughly €7 billion total seen in each of the prior months. However, this reading by no means signifies a slowdown in issuance, as close to €2 billion of bonds priced in the first two days of May. For the year to date, European borrowers raised €27.8 billion in the high-yield bond market, more than double the €13.5 billion seen at this time last year, and just €8.5 billion away from the full-year tally for 2012. If issuance continues at the same pace for the remainder of the year, 2013 can easily smash the 2010 record of €44.4 billion.
The default rate by principal amount stayed level at 5.9% at the end of April while the default rate by issuer count fell to 7.1% at the end April from at 7.2% at the end of March.
Themes to watch for going forward
- CLOs emerge back on the landscape, according to LCD reports, there are 4 vehicles in the pipeline totaling €1.4 billion consisting of vehicles from Alcentra, Blackstone / GSO, Carlyle and ICG. So far this year, 3 vehicles have priced for a total of €964 million from managers Apollo, Cairn and Pramerica.
- Further spread / yield compression is expected, as loan issuers use access to the high yield markets to reduce existing spreads.
- Along with repricings, some sponsors are tabling dividend recap deals to take advantage of investor demand, both in loans and high yield.
- Still strong demand for high yield bonds, so far this year, net inflows stand at €2.9 billion.
- Bond for loan-take-outs will continue to keep pace as issuers address their maturity concerns.
A video of this presentation is available at:
Slideshare download is available at:
– Sucheet Gupte