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European debt markets set for record year of issuance

  • EUR 209bn has already been deployed this year across leveraged loans and high yield bonds
  • Leveraged loans experienced a record year during the first half of 2017
  • Refinanced capital took 61% of transactions during first three quarters of 2017

Debtwire, the fixed income data and intelligence provider, have released new data showing that the leverage debt markets are set to have a record year of issuance. As much as EUR 209bn has already been deployed in the first three quarters of the year across leveraged loans and high yield bonds with deals continuing to hit the market hard and fast. The data was announced at Debtwire Week held at the Waldorf Hilton in London on 10th October 2017.

According to Debtwire, leveraged loans in particular experienced a record year in the first half of 2017, with as much as EUR 75.9bn issued in 1Q17 and EUR 52.7bn in 2Q17, compared to EUR 29.5bn and EUR 33.2bn in the same quarters in 2016.

Refinanced capital is taking the lion’s share of deal volume, with 61% of transactions in the first three quarters of 2017 compared to 51% in the whole of 2016. This suggests that while an increasing amount of debt is being issued, the level of new money – new debt being issued instead of recycled - is actually decreasing.

The high volume has pushed market dynamics further towards a borrower’s market, with pricing on Term Loan Bs decreasing to Euribor+ 352bps on average from E+ 414bps in 2016 and E+ 429bps in 2015. The trend was also mirrored in the high yield bond market, with the average pricing dropping to 5.10% this year from 5.6% in 2016 and 5.8% in 2015.

Korey Fevzi, partner in Shearman & Sterling’s Finance practice commented:

“It’s been a very active year for the leveraged loan market, with borrowers taking advantage of high liquidity levels and a competitive credit market to drive down pricing, increase leverage levels and loosen documentation terms. With leverage levels increasing, it will be interesting to see how the ECB’s Guidance will impact the governance of credit, syndication and underwriting of syndicated loans in financial institutions."

Borrowers have also benefited from looser documentation, with covenant-lite deals (without maintenance covenants) becoming the norm at over 75%, portability increasing to 13% in 2017 compared to 3% in 2016 and other terms such as EBITDA add-backs, various baskets and margin ratchets creeping in.

However, the ECB is lurking around the corner with its guidelines, ready to throw a bucket of cold water in the market with its upcoming guidelines on leveraged transactions, which is effective from 16 November 2017. So far, the looming guidelines have failed to deter aggressive behaviour, with some deals hitting the 7x leverage mark – significantly above the threshold allowed.

“While the guidelines cover more deals that many people may realise, they do not affect all loan originators or investors in the European market. It remains to be seen to what extent the guidelines will prove to be an effective regulator of increasing leverage levels overall or whether they will give unregulated institutions a competitive advantage or provide a fillip to the high yield bond market – which is not covered by the regulations” said James Slessenger, Managing Director of Xtract Research.

Direct lenders are also standing firm waiting for some fallout action, given they are not subject to the guidelines.

About Debtwire Week:

Across four days of conferences and social events, Debtwire Week aims to help attendees identify, explore and source opportunities across a broad range of fixed income strategies. Debtwire Week features the views of the most prolific credit funds, leading banks, advisors and keynote speakers on the themes that will dictate yields in the year to come. The programmes are driven by our knowledge of all things credit. Over 125 speakers will be led by our team of editors and analysts from leveraged finance, real estate, emerging markets, NPLs and restructuring desks. Each day of Debtwire Week is organised around a core theme – Leveraged Finance, Markets and Restructuring held on 9th – 12th October 2017 at the Waldorf Hilton in London.

About Debtwire:

Part of the Acuris family, Debtwire provides high value news, data and analysis on debt markets worldwide. We offer unique insights, credit analysis, debt data, and covenant research for the distressed debt and leveraged finance markets. To complement the newsfeed, Debtwire’s credit analysis and research teams provide deep technical details and angles that help you understand situations more clearly.

Olivia Cummins Event Producer Acuris
Olivia Cummins Event Producer Acuris

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