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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