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European Leveraged Loan Market Hits Record Size in 2018

The European leveraged loan market grew by €2.5 billion in December, bringing the asset class to a record  €181 billion at year-end, from €178.5 billion in November, according to LCD’s European Leveraged Loan Index (ELLI).

While issuance of new leveraged loans stalled in December, the Index grew, as a number of November launches allocated and joined the ELLI.

Overall, the size of the invested institutional market increased by 30% during 2018, as tracked by the ELLI, on the back of strong supply of M&A-related loans. Institutional new-issue volume for this purpose rose to a post-crunch high of €57.7 billion last year — up from €41.6 billion in 2017, and above the roughly €30 billion average between 2014 and 2016, according to LCD.

Opportunistic transactions such as refinancings and recaps declined significantly in 2018, to just €19.6 billion, from the €58.5 billion record-high tracked in 2017. Moreover, roughly 70% of the 2018 tally came from the first half of the year. – Marina Lukatsky

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European Leveraged Loans Lose 0.74% in December, Gain 1.41% in 2018

europe loan returns

The fourth quarter of 2018 ended on a much more sour note than it began, as European leveraged loan prices went from holding steady in October to taking a plunge in November, followed by an even bigger sell-off in December.

In the last month of the year the S&P European Leveraged Loan Index (ELLI) lost 0.74%, which is the worst monthly performance in almost three years, following a 0.52% loss in November and a coupon-clipping positive 0.33% return in October.

Despite this decidedly poor showing, the European loan segment outperformed its U.S. counterpart, which returned a scant 0.44% in 2018, after a brutal 2.54% slide in December, according to the S&P/LSTA Index.

European leveraged loans returned 1.41% in 2018, besting not only the U.S. loan segment, but significantly ahead of European high yield bond returns, and equities.

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European Leveraged Loans Lose 0.52% in November

europe leveraged loan returns

The European leveraged loan secondary market encountered treacherous conditions in November, amid a sharp sell-off in global financial markets. And while this weakness sent the S&P European Leveraged Loan Index (ELLI) towards its lowest return since just after the Brexit vote in 2016, it still outperformed its U.S. counterpart and other European asset classes.

In November the ELLI lost 0.52%, which is the worst return since June 2016 (when it declined by 0.60%), and only the second month in the red in 2018 (the Index lost 0.43% in June). On average, loans have gained 19 bps per month so far this year.

For the year through Nov. 30 the Index was up 2.16%, putting 2018 on track to be the worst year for European loan returns since 2011. For reference, the ELLI had gained 4.11% by this time last year. – Marina Lukatsky

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Volatility, Yes, though European Leveraged Loans Faring Well vs High Yield, Equities

europe nov asset growth

Sentiment in the European leveraged loan market has taken a turn for the worse over the last couple of weeks, forcing loan issuers and investors to adjust — sometimes sharply — as a result. Loan traders have led much of this volatility, although the market looks to be taking its cue from larger moves in high yield, equities, and the U.S. market.

The secondary market illustrates the sudden shift in loan sentiment, with average bids on the S&P European Leveraged Loan Index (ELLI) rising from a summer trough of 98.41 at the start of July to a peak of 99.20 in the middle of October. Since then it has since traded steadily lower, hitting a mid-98 level this week.

Compared with other asset classes, a 75 bps fall would not be much more than a rounding error, and loans remain relatively calm when contrasted with other markets.

“High yield and the U.S. markets are importing volatility into European loans,” said a London-based fund manager. “Conditions in Europe are tough, but the market is still functioning.” Indeed, mapping the comparative performances of equities, high yield, and loans shows how the latter asset class continues to avoid the swings seen in the more heavily traded markets. – David Cox

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As M&A lags, Europe’s PE shops look to leveraged loans, high yield for dividends

The European leveraged finance markets swallowed five new dividend-related transactions totalling €2.24 billion in November, as a lull in M&A activity in the fourth quarter allowed issuers to hit the market with opportunistic transactions.

For much of the year, such dividend-related issuance has not been possible as M&A transactions dominated the primary market. “We’ve just had a six-week period with no M&A, and it’s been the first real opportunistic window we’ve seen this year,” said one market participant. “When the window is there, why would private equity turn down the chance to return money to shareholders and protect its returns?”

europe sponsored loan volume

 

But while there was a small spurt in dividend recap supply in November, the dominance of M&A activity over much of 2018 means the volume of opportunistic recaps seen so far this year has still fallen well behind some previous years.

The loan market has hosted roughly €5.87 billion of dividend activity so far this year while the bond market has taken €1.41 billion, for a total of €7.28 billion, according to LCD. While this is higher than the totals recorded in 2015 and 2016 on this measure (at €3.67 billion and €5.61 billion, respectively), it is still way behind the record-breaking volume racked up in 2017, when the market was dominated by opportunistic activity.

The dividend recaps seen so far in 2018 have resulted in some €2.64 billion being returned to shareholders via the leveraged finance market, which is well below the average of €4.5 billion for the 2006–2017 period. By contrast, in 2017 roughly €8.15 billion was returned to shareholders from the proceeds of deals in the bond and loan markets. — Nina Flitman

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Guidelines? Leverage on European Loans Creeps Higher, Just Like in US

europe loan leverage

Leverage on European loans continues to tick higher, rising to 5.4x as of mid-November, the highest since the 6x in 2007, before the onset of the financial crisis, according to LCD.

And at 4.8x, leverage through the first-lien debt of a loan issuer’s capital structure is the highest it has ever been, while the surge in second-lien loan issuance this year adds another 0.35x of leverage, double that of last year.

This picture is broadly similar to that seen in the U.S., save for one key difference: There hasn’t been a mellowing in attitude towards the European Central Bank’s guidelines regarding leverage, as these were already deemed toothless by the European market. The knock-on effect from the less-stringent approach to the U.S. guidelines is likely to have had more of an impact, market sources say, though European bankers are far keener to say they remain conservative, if only due to self-regulation.

“The ECB is another item to discuss in [credit] committee,” explains a banker. “But if a credit is going to be declined, it’s usually way before we get to the ECB questions. We don’t need the ECB to tell us to consider cash flow valuations — that is just how leverage finance works. I’m not sure that our acceptance/decline rate has changed since the guidance.”

“We will always be careful as it’s our business,” notes a head of origination. “It’s part of our thought process but I think at the moment, market conditions will impact underwriting more. That said, there are some quite aggressive pitches out there, and it is the U.S. banks leading the pack.” – Luke Millar

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Riskier Borrowers Gobble Up Increasing Share of European Leveraged Loan Mart

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The European leveraged loan market has grown rapidly over the last year, aided by a surge in issuance from riskier, single-B credits, as the pricing differential between this debt and other, higher-rated loan issues hit post-crisis lows. Investors attribute this spread compression to fierce investor competition for floating-rate assets.

But the growth in lower-rated names may be setting the scene for a rise in triple-C credits – the lowest rung on the ratings ladder for active debt issuers – further down the line, sources say.

The single-B portion of outstandings, per the S&P European Leveraged Loan Index (ELLI), has grown by 37% since the pre-crisis halcyon days of 2007, and by 42% just in the last 12 months. In absolute terms, this growth far outstrips that of double-B issuance. Indeed, the measure for trailing 12-month net growth in outstandings in the ELLI has averaged €2.5 billion in double-Bs since the start of 2017, and €25 billion for single-Bs.

Over the last year, the single-B growth is €38.6 billion.

This slant toward lower-rated debt matches movement seen in the investment grade market, where BBB level debt increasingly is taking a larger share of the market. This migration in credit quality alarms more than a few market watchers, as the current credit cycle – which has featured ever-looser loan structures – creaks along in its tenth year.

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Video: November European Leveraged Loan Market Analysis

In November’s Capital Markets View video, LCD’s Luke Millar and S&P Global’s Chris Porter cover the main trends in the European leveraged loan market. Discussed this month:

  • October’s loan issuance and the pipeline going forward.
  • How the market has turned again in favour of issuers, with lower pricing and strong demand from CLO investors.
  • Predictions on CLO volume for full-year 2018.
  • A look ahead at the markets into the first quarter of 2019.
  • Comparison of the growth of loans, bonds, and the FTSE 100, given a €1,000 investment.

The URL for the video: https://www.spratings.com/en_US/video/-/render/video-detail/capital-markets-view-november-2018

Luke Millar, sitting in this month for LCD’s Taron Wade, leads LCD’s European News efforts. Chris Porter is Head of Loan Recovery & CLO Business Development, S&P Global.

Please feel free to contact Chris if you’d like a particular topic discussed in next month’s video.

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In Europe, Second-Lien Loans Grow in Favor, at Expense of High Yield Bonds

europe second lien volume

The market for second-lien leveraged loans in Europe has increased to the extent that it often offers a real alternative to high-yield bonds.

This has become the case even if demand for this relatively risky type of debt tends to be credit-specific, and even if the costs for second-lien are higher (they are).

But for borrowers in a strong position or that are well known to market, the spread over LIBOR paid by issuers on second-lien loans has narrowed enough that – when combined with the product’s inherent flexibility – it is an increasingly appealing subordinated capital choice for private equity sponsors, market players say.

The depth of demand for the product was illustrated recently when Sivantos wrapped a €500 million second-lien to take-out the major part of a bridge loan previously destined for high-yield. The size of this deal underlines how second-lien has moved from a niche and relatively minor source of capital to the mainstream – even if sources caution few borrowers have the same pull as the hearing-aid maker.

LCD data shows an increase in both deal size and volume, though these remain significantly short of those seen prior to the crash. This is because second-lien issuance is now frequently privately placed, whereas it was almost always syndicated in the pre-crash years. As such, when pre-placed deals like Sivantos are captured in the data, it is clear there has been a surge in second-lien volume over the past year.

As its name implies, second-lien debt is repaid after the more-senior, first-lien debt is repaid, making it inherently riskier. – David Cox

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European Leveraged Loans Top Other Assets Classes in Rocky October

europe returns comps
The European leveraged loan market proved its resilience once again in October. Amid a sharp sell-off in global equity markets and losses in high-yield, European loans remained in the black, while its U.S. counterpart and other European asset classes dipped into the red.

Consequently, the S&P European Leveraged Loan Index (ELLI) gained 0.33% last month — down from 0.56% in September and the lowest reading since the 0.43% loss in June. Nonetheless, October’s return exceeded the monthly average so far this year of 0.27%, and the trailing 12-month average of 0.24%. For the year through Oct. 31 the ELLI was up 2.69%, lagging last year at this time, when it had returned 3.87%.

European high-yield bonds tracked by the Merrill Lynch European High-Yield Bond Index lost 1.22% in October, a five-month low, while equities were down 5.09%, for the worst decline since August 2015. As a result, European loans outperformed all the other asset classes that LCD tracks in October. – Marina Lukatsky

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