Europe’s leveraged finance market is likely to stay buoyant for at least the rest of 2018, and probably the best part of 2019, says S&P Global Ratings in a report titled “How Long Can Europe’s Leveraged Finance Market Bonanza Last?”
“As long as Europe’s growth cycle remains on track and is supported by quantitative easing and exceptionally low rates, we believe the operating environment is likely to be supportive,” said S&P Global Ratings in the report. “This is despite a number of potential problems that could trigger a turn in the market, most of which are external.”
The agency goes on to say that after €94 billion in high-yield bond issuance and €120 billion of leveraged loan issuance in 2017, market volumes are holding up in 2018, with €30.1 billion in bonds and €41.2 billion in loans issued in the first four months of the year.
The report states that causes for optimism include the improved credit performance of European corporates in recent months — with rating downgrades versus upgrades for high-yield issuers moving close to being balanced — and that this is backed by a macro environment that is supportive of operating performance, cheap funding conditions that are boosting the interest-coverage ratio, and a relatively prudent financial policy. Leverage has increased, but Europe sees less shareholder-friendly activity than in the U.S., where dividend payments and share buybacks tend to be a more prominent feature, S&P Global Ratings adds.
Another positive is the debt maturity profile, which gives companies some breathing space. Many issuers opportunistically refinanced their debt leveraging in the past year’s very favourable conditions, and debt maturities don’t pick up until 2021, thereby mitigating short-term risks, the agency adds.
“All this indicates to us that the tide is not yet ready to turn in Europe in 2018, and perhaps not even in 2019,” says the report. “As a result, we expect the corporate default rate in EMEA to remain very low at 2.5% by the end of 2018.” — Luke Millar
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