We have already commented on the strong growth of the covenant-lite market in Europe for leveraged loans. The combination of a supply/demand imbalance in European leveraged loans — too little supply and much investor demand — and competition from the US leveraged loan market, has resulted in strong growth in the European covenant-lite loan market since the beginning of 2014. There has also been a loosening of covenants generally for mid and top-tier European loan financings, whether taking the covenant-lite form or not.

News from China and other emerging markets and the general decline in various commodity prices, together with concerns over the possible effects of an increase in interest rates in the US, have caused volatility in the equity markets. This volatility has also been reflected, to differing degrees, in the high yield and leveraged loan markets around the world.

This volatility has not, however, been uniformly reflected in all leveraged loans. The US has turned more cautious, while the mid-market and lower top-tier European loan sector has also become more cautious for syndicated deals, rolling back some of the most aggressive positions of the previous year or so.

Despite this caution, the supply/ demand imbalance for European top-tier financings, usually involving about €800 million in loan debt or more, has allowed borrowers to continue negotiating favourable covenants.

The outlook for European leveraged loan liquidity remains positive, as evident in loan pricing relative to the US market. It remains to be seen, however, whether the investor caution in the US and some parts of the European market will affect the top-tier market, or whether the European leveraged loan market will sustain this two-speed approach.