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Riskier Borrowers Gobble Up Increasing Share of European Leveraged Loan Mart

b rated europe loans

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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LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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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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LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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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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LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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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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With Big Deals to Finance, Cross-Border Loan Issuance Booms

x-border loan issuance

The global volume of cross-border leveraged loan transactions has topped $100 billion in the year to date, with some $102 billion of this activity seen so far in 2018, according to LCD.

Should the pace of this issuance continue, the market is set to top the $110 billion cross-border volume notched in 2017, which is the highest figure recorded in more than a decade. By this point in 2017, the market had hosted $90.3 billion of cross-border issuance — though it has to be said the launch pipeline for the remainder of this year is not looking overly full.

These figures highlight the fact that the global leveraged loan market has become increasingly interconnected over the last few years, as borrowers look to raise ever-larger sums, and generate global cash flows.

Much of this year’s cross-border activity has hit the market since the summer break, with 14 global transactions launched since the beginning of September — offering a balanced blend of both new-money buyout and M&A-related deals, as well as opportunistic repricings and amendments.

That said, cross-border deals are particularly well suited to large new-money acquisition situations and the structure has been used on most of the year’s banner syndications, such as debt backing the buyouts of Refinitiv and Akzo Nobel Specialty Chemicals. In such cases, the structure not only allows borrowers to better-match their liabilities with revenue, but it can also bring competitive tension to syndications, and therefore provide an overall more attractive funding package. – Nina Flitman/David Cox

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LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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As Brexit Dealings Drag On, Sterling High Yield Issuance Dwindles

As the Brexit negotiation debacle drags on, with no clarity on the final deal yet emerging, the leveraged finance markets have spent the year plagued by uncertainty.

Any ambiguity is typically a headwind for markets, but the consequences in this case have tended to differ between leveraged loans — which have seen robust volumes from U.K. borrowers and no discernible spike in pricing — and the bond market, where volumes have fallen and new-issue yields have shot up.

“It is very hard to price risk with no clarity,” comments a head of EMEA leveraged finance. “Sterling volumes in high-yield are down 40–50% this year. The marginal investor sets the price, so it has gotten more expensive. And while there has been some success on individual deals, volumes are down in the main.”

Indeed, high-yield issuance from U.K.-domiciled companies is at its lowest level since the Brexit referendum took place in 2016, currently running at $15.5 billion-equivalent in the year to date, versus $15.15 billion in all of 2016. Last year, this volume was up at $27.4 billion as companies looked to get deals done before the Brexit noise grew louder this year.

Sterling-denominated high-yield supply has also collapsed, falling to €4.5 billion-equivalent so far this year, versus €12.6 billion in all of last year. The total is only a touch lower than the €4.7 billion seen in FY16 however, which itself was the lowest full-year tally on this measure since €4.2 billion was recorded in 2010. Note, last year’s volume is a record-high since LCD began tracking the market in 2005. – Luke Millar

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LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Free LCD/S&P Global Market Intelligence Webinars

Free Event: Downstream Impact of Current Leveraged Loan Market Dynamics 11/1/18

A new, on-demand Webinar from LCD and S&P Global Market Intelligence is now available, examining the downstream impact of current U.S. leveraged loan market dynamics.

The free Webinar can be viewed here. All the slides used in the presentation are available for download.

This in-person event, conducted on Oct. 29, features a panel discussion moderated by LCD Sr. Editor Shivan Bhavnani, with

  • Andrew Bellis, Managing Director, Head of Liquid Loans at Partners Group
  • Pat Daugherty, President & Chief Investment Officer, Glacier Lake Capital
  • Mitchell Drucker, Managing Director at Garrison Investment Group
  • Randy Schwimmer, Senior Managing Director, Head of Origination & Capital Markets at Churchill Asset Management

Panel topics:

– Covenant erosion
– Unrestricted versus restricted subsidiaries
– Portability: What is it, and why are people talking about it?
– What will recovery rates look like after the next downturn?
– How does the current market (peak?) stack up vs 2007/08?
– What will the market see in 2019?

subordinated debt cushion

Also in this Webinar:

  • LCD Managing Director Ruth Yang provides a detailed look at credit risk, loan market recoveries, and the (considerable) value of a debt cushion.
  • Andrew Watt, Managing Director, S&P Global Ratings, focuses on that state of today’s credit market, and whether there are warning signals that the cycle is ending.
  • LCD Managing Editor Tim Cross presents an overview of today’s U.S. leveraged loan market, focusing on recent big-ticket LBOs, leverage, and issuance.

3Q18 Global High Yield Outlook (with Marty Fridson) 10.19.18

LCD/S&P Global Market Intelligence’s webinar detailing the third-quarter 2018 high-yield markets, and a look ahead to the fourth quarter, is now available to view free, on-demand.

This presentation features analysis from Marty Fridson of LCD and Lehmann Livian Fridson Advisors, along with John Atkins, Luke Millar, and Ruth Yang of LCD.

You can view the webinar here.

In this quarter’s presentation:

  • HY returns, vs Treasuries, equities
  • Total HY return, by region
  • Total return, by ratings
  • Total return, by maturity
  • Total return, by industry
  • Credit spread curve
  • HY bond prices
  • Europe leveraged finance volume: M&A
  • Cross-border activity
  • New-issue yield vs guidance

LCD presents these high-yield market updates each quarter.


M&A Outlook, with Focus on Debt, Private Equity

S&P Global Market Intelligence is pleased to present a free webinar detailing today’s M&A market, including how current and potential obstacles might affect the leveraged finance world:

M&A Overview, with Focused Insight on the Debt and Private Equity Markets 

  • Date: Thursday, October 11, 2018
  • Time: 11:00 am – 12:00 pm Eastern time
  • Duration: 1 hour

You can register for the webinar here (link).

Included in the webinar: Transaction activity has always been impacted by numerous outside factors. Recent complications include Brexit, trade wars, and tariffs. With numerous potential influences, what is the current state of the market, based on these latest trends?

Join S&P Global Market Intelligence for a complimentary webinar, where industry experts share their insights while focusing on the M&A, Debt, and Private Equity transactional markets.

  • Analyzing recent global M&A volumes and factors driving activity. What is the outlook of M&A deals for the US?
  • Debt markets and LBO activity: What is the current state of the market?
  • Deep dive into private equity including buy and sell-side conditions and strategies

Moderator
Lawrence Choy
Associate Director – Corporates Segment
S&P Global Market Intelligence

 

Panelists
Nathan Stovall
Senior Research Analyst – FIG Research
S&P Global Market Intelligence

 

Ruth Yang
Managing Director – Leveraged Commentary & Data
S&P Global Market Intelligence

 

Justin Abelow
Managing Director – Houlihan Lokey
Financial Sponsors Group

Webinar viewers can, while registering, submit questions to be answered by the panelists.


2Q18 Global High Yield Outlook (with Marty Fridson)

LCD/S&P Global Market Intelligence’s webinar detailing the second-quarter 2018 high yield markets, and a look ahead to the second half of the year, is now available to view free, on-demand.

This presentation features analysis from Marty Fridson of LCD and Lehmann Livian Fridson Advisors, along with John Atkins, Luke Millar, and Ruth Yang of LCD.

You can view the webinar here.

hy default recessions

In this quarter’s presentation:

  • Today’s dire high-yield headlines, vs. market realities
  • U.S. high-yield issuance sinks …
  • … though M&A/LBO share of market rises
  • HY prices in the secondary soften noticeably
  • European high-yield issuance sinks, as well …
  • … with a host of offerings pulled from market
  • High-yield spreads rise in the U.S. and Europe

hy prices

LCD presents these high-yield market updates each quarter.

The charts used in the presentation are available for download.


Free Webinar: 1Q 2018 US/Europe High Yield Analysis (Fridson)

LCD/S&P Global Market Intelligence’s webinar detailing the First-Quarter 2018 High Yield Markets is now available to view, on-demand.

This complimentary presentation features analysis from Marty Fridson of LCD and Lehmann, Livian, Fridson Advisors, along with John Atkins, Luke Millar, and Ruth Yang of LCD.

You can view the webinar here.

In this quarter’s presentation:

  • Treasury yields rise while high yield sinks
  • High yield upholds hybrid reputation
  • High yield returns favor shorter maturities
  • Better-rated credits underperform
  • High yield outperforms vs better-quality comps
  • In the red: a look at industry returns
  • US high yield volume, pricing
  • Europe high yield volume, LBO activity
  • Spreads, Europe vs US

LCD presents these high yield market updates each quarter.

The charts used in the presentation are available for download.


The Global Credit Markets – 10 Years After the Credit Crunch

LCD and SP Global Market Intelligence are pleased to present a free replay of our in-depth analytical look at how today’s leveraged finance market compares to that of 2007–08, before the onset of the credit crisis: 10 Years Down the Road: The U.S. Leveraged Finance Markets, Then vs Now

This in-person complimentary event features analysis from high-yield bond market expert Martin Fridson and LCD’s Marina Lukatsky, as well as a discussion on the state of today’s market, featuring Crescent Capital Managing Director Jonathan Insull, LSTA Executive Director Lee Shaiman, Progow Executive Chairman Peter Gleysteen, and LCD Senior Editor/CLO market reporter Andrew Park. The panel is moderated by LCD Managing Director Ruth Yang.

A link for the replay is here.
The replay is free, and after registering for the presentation users can download the slides used for the analysis. These include:

  • A brief history of the leveraged finance market, over the past 10 years (Yang)
  • A look at credit quality progression in the high yield bond market (Fridson)
  • The effect of record-low volatility (?) and reduced liquidity in the high yield market (Fridson)
  • Evolution of the US leveraged loan mart: size, issuer quality, covenant-lite (Lukatksy)
  • Risk vs Reward: Now, compared to pre-Lehman (Lukatsky)
  • That state of the CLO market (Shaiman, Gleysteen, Park)

Global High Yield Markets: 2017 Review/2018 Outlook

January 23, 2018

Featuring LCD’s high yield expert Martin Fridson. Some of the topics covered:

  • Yields
  • Return vs risk, by asset category (with surprising results re distressed debt)
  • Total return, by industry
  • Default rate forecast
  • Poll: Will US HY spreads go up/down/unchanged in 2018?

webinar chart 1

As well, the webinar features reviews/outlooks of the U.S. leveraged loan market, along with the European high yield and leveraged loan markets.


Leveraged Finance Yields (and CLOs): How Low Can They Go?

July 12, 2017

Featuring LCD CLO reporter Andrew Park. Some of the topics:

  • A look at record-low yields in the leveraged loan market
  • Analysis of loan market supply (new loan issuance) vs Demand (retail investment + CLO issuance)
  • Specifics on CLO formation
  • Cost of borrowing: US (cheap) vs Europe (not cheap)
  • Why CLOs are attractive investments

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Leverage Creep: With EBITDA Adjustments/Synergies, Risky Loans Grow Riskier

synergies 7x loans

EBITDA adjustments, or add-backs, have been a hot topic in the global leveraged loan and high yield bond markets over the past few years as private equity shops undertaking large M&A deals increasingly rely on this technique for financing.

Of course, these adjustments – where a PE shop or acquiring entity can add an expense back to profits, significantly improving a transaction’s pro forma numbers – are not without controversy. Debt investors complain vociferously that, via add-backs, actual risk is being masked, as borrower leverage down the road will be understated if the rosy earnings numbers detailed now don’t actually come to pass.

The largest portion of these add-backs comprises synergies, or the potential financial costs savings of combining two companies.

But just how much risk do these adjustments/synergies add? If a transaction’s debt/EBITDA ratio has crept higher based on adjusted EBITDA alone, how much riskier are these deals if EBITDA adjustments are stripped out?

A significant amount, apparently, when looking at the more aggressive deals in market, and when considering synergies. For example, a relatively slim 8% of U.S. leveraged loans backing M&A had pro forma debt/EBITDA of 7x or higher this year, including synergies, up from 5% last year and on par with 2014. While this metric has risen in recent years, it remains far below the 2007 record of 17%.

Assuming, however, that expected synergies are not achieved, the share of M&A transactions levered at 7x or higher jumps to 17% this year, up from 14% in 2017 and just a few percentage points below the 2007 record of 19%. – Marina Lukatsky

This story is part of a longer piece of analysis, available to LCD News subscribers, from LCD that details add-backs/EBITDA adjustments in detail.

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Follow LCD on Twitter.

LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Free Webinar: 3Q18 Global High Yield Outlook (with Marty Fridson)

LCD/S&P Global Market Intelligence’s webinar detailing the third-quarter 2018 high-yield markets, and a look ahead to the fourth quarter, is now available to view free, on-demand.

This presentation features analysis from Marty Fridson of LCD and Lehmann Livian Fridson Advisors, along with John Atkins, Luke Millar, and Ruth Yang of LCD.

You can view the webinar here.

In this quarter’s presentation:

  • HY returns, vs Treasuries, equities
  • Total HY return, by region
  • Total return, by ratings
  • Total return, by maturity
  • Total return, by industry
  • Credit spread curve
  • HY bond prices
  • Europe leveraged finance volume: M&A
  • Cross-border activity
  • New-issue yield vs guidance

LCD presents these high-yield market updates each quarter.

Try LCD for Free! News, analysis, data

Follow LCD on Twitter.

LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Free Webinar from S&P: M&A Outlook, with Focus on Debt, Private Equity

S&P Global Market Intelligence is pleased to present a free webinar detailing today’s M&A market, including how current and potential obstacles might affect the leveraged finance world:

M&A Overview, with Focused Insight on the Debt and Private Equity Markets 

  • Date: Thursday, October 11, 2018
  • Time: 11:00 am – 12:00 pm Eastern time
  • Duration: 1 hour

You can register for the webinar here (link).

Included in the webinar: Transaction activity has always been impacted by numerous outside factors. Recent complications include Brexit, trade wars, and tariffs. With numerous potential influences, what is the current state of the market, based on these latest trends?

Join S&P Global Market Intelligence for a complimentary webinar, where industry experts share their insights while focusing on the M&A, Debt, and Private Equity transactional markets.

  • Analyzing recent global M&A volumes and factors driving activity. What is the outlook of M&A deals for the US?
  • Debt markets and LBO activity: What is the current state of the market?
  • Deep dive into private equity including buy and sell-side conditions and strategies

Moderator
Lawrence Choy
Associate Director – Corporates Segment
S&P Global Market Intelligence

 

Panelists
Nathan Stovall
Senior Research Analyst – FIG Research
S&P Global Market Intelligence

 

Ruth Yang
Managing Director – Leveraged Commentary & Data
S&P Global Market Intelligence

 

Justin Abelow
Managing Director – Houlihan Lokey
Financial Sponsors Group

Webinar viewers can, while registering, submit questions to be answered by the panelists.

Try LCD for Free! News, analysis, data

Follow LCD on Twitter.

LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.