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London, United Kingdom, 17th October 2018: Debtwire, the fixed income data and intelligence provider, has released new data showing that the appetite for leveraged loans and high yield bonds remains robust. On the bond side, there have been inflows into high yield bond funds, while loans have also seen inflows via CLOs and new separately managed account (SMA) money. This appetite is mainly driven by the low/negative rate for longer environment, which has resulted in very strong demand for yield. However, fears of a potential recession coupled with Brexit continue to dampen the outlook on financing activity, despite support from the M&A pipeline, liquidity in the market from repayments, and a surplus of dry powder. The data was announced at Debtwire Week held at the Waldorf Hilton in London on 17th October 2019.
Source: Debtwire Par
On the CLO side of the market, European new-issue volume this year, at EUR 22.2bn, is ahead of the EUR 20.7bn posted in the same period last year. After a quiet August, which saw no deals price, issuance in September got back on track with 5 deals pricing for a total of EUR 2bn.
Despite the appetite for loans, supply is down this year, due to reduced market participation in the leveraged loan space because of macroeconomic concerns, trade wars, and a drop in sterling transactions related to Brexit jitters and the knock-on effect of an anticipated recession – an echo of market activity in Q1 2019. Leveraged loan volume is off 10% at EUR 147bn and the institutional loan segment is down 8% to EUR 80bn (and the new money portion down a much larger 20% to EUR 50bn). On a quarterly basis, leveraged loan volume fell to EUR 48bn in 3Q19 from EUR 58bn in 2Q19.On the other hand, high yield bond volume climbed to EUR 26.9bn in 3Q19, topping the EUR 25.7bn posted in 2Q19.
Given the low level of overlap between Western European leveraged loan and high yield bond issuers this year, there are some notable differences in issuance by broad sector classification. The industrial & chemicals, a generally stable, non-cyclical sector, tops the list for both leveraged loans (25% share) and high yield bonds (21% share) with deals including JCI Power Solutions EUR 1.995bn leveraged loan euro tranche and EUR 700m euro high yield bond backing its LBO. The second most active sector for leveraged loans is pharma, medical & biotech - with deals such as Nestle Skin Health S.A.’s EUR 1.335bn leveraged loan euro tranche - which accounts for 12% of deal flow, compared to a lowly 1% of high yield bond issuance. Another notable difference is in the financial services sector, which accounts for only 3% of leveraged loan issuance year-to-date versus 18% of high yield bonds.
Colm Doherty, Debtwire Par’s Global Head of Primary Market Analysis, commented: “Like in the US market, there is a degree of caution in the loan market, with concerns around price risk and not just credit risk, as investors try not to make a mistake going into the final quarter of the year. At the individual credit level, loan investors are cautious around the potential for weak performance resulting in a big drop in a name in the secondary market and dragging down performance as we approach the end of 2019.”