Issuance in the primary hit a post credit-crunch high in May, while secondary markets were down. CLO issuance was promising, with more in the pipeline, although new EBA directives threaten to hinder issuance going forward. More spread/yield compression is expected going forward, as issuers play loan and bond investors against each other in search of best terms.
- Loan issuance was €8.7 billion in May 2013, while high yield issuance was t €9.0 billion.
- According to JP Morgan HY research: estimated inflows into European HY funds was €975 million for May versus €555 million for April. This brings year-to-date inflows to almost €4.0 billion.
- Secondary markets were down. Loan markets were down 17 bps to finish the month at 100.41 while high yield markets were down 139 bps to finish the month at 103.24.
- The S&P European Leveraged Loan Index (ELLI) finished the month up 0.11%.
- Default rates stayed roughly the same.
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 fell 17 bps to finish the month at 100.41. Loan prices did go up as high as 100.61 only to fall 20 bps in the last week (on the back of softness in the global credit markets). This is the biggest swing in the last seven weeks, as a result, the average is at its lowest level since mid-April, although it remains 307 bps above 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 down 140 bps at 103.24, on the back of a sell-off in the broader credit markets. A sell-off in U.S. Treasuries started last week when the U.S. Federal Reserve flagged the potential for tighter monetary policy. A negative bias subsequently seeped into the credit markets – especially high-yield, where bonds across the board lost about a point. The average bid is now down 202 bps from the 2013 high of 105.26, from early May. Still, it is 28 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 0.11% for the month of May, down from the 0.88% seen in April. This brings the year-to-date return to 3.19% versus 4.63% 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.
Leveraged finance markets raised the bar in May, as issuance reached a post-crunch high of €17.6 billion, split fairly evenly between leveraged loans and bonds, at €8.7 billion to €9 billion respectively. Looking at loans first, the current volume is at its highest level in two and a half years. Sponsored volume accounted for the majority of May’s activity, at €7.6 billion, the highest reading since July 2008. Behind this impressive figure stand two mega-sized buyouts, each setting a post-crunch record in its own right. First, the €3.3 billion loan financing the buyout of D.E. Master Blenders by a Joh. A. Benckiser-led investment group is the largest buyout-related loan in six years (since National Grid Wireless in May 2007). It also makes the top-ten list of LBO loans on record, dating back to when LCD started tracking the European leveraged loan market in 2000.
High-yield went from strength to strength in May, hosting the largest monthly volume of paper in the history of the market, with €9 billion issued. This came about due to a surge in issuance rather than just a few big tickets, with only five borrowers issuing deals sized at €500 million or more. A total of 23 companies tapped the high-yield bond market in May, compared with 12 in March 2011, the month which held the prior volume record, with €8.4 billion.
The default rate by principal amount was down to 5.8% at the end of May from 5.9% at the end of April while the default rate by issuer count fell to 7.2% at the end May from at 7.1% at the end of April.
Themes to watch for going forward:
- GSO Blackstone priced their CLO in May, bringing YTD CLO issuance at €1.34 billion with still a few more managers and vehicles on the forward pipeline. However new directives from the EBA could hinder new CLO issuance.
- Further spread / yield compression is expected, as issuers use access to the capital markets to reduce existing spreads and vice-versa, essentially playing off loan investors against bond investors and vice-versa to get the best terms possible.
- Given the buoyant equity markets, expect further IPOs from some sponsor led companies, allowing them to return cash back to their LPs.
- Global co-mingled funds being launched, combining loans and high yield bonds that have a focus on both the US & Europe.
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– Sucheet Gupte