In a market that has seen notable highs and lows since the financial crisis, while remaining ever-vigilant for red flags, a degree of consistency is beginning to take hold in European leveraged finance .
The European leveraged finance market is looking stable overall for 2020, after topping €300 billion in 2019. Leveraged loan issuance in the region remained steady, reaching €209.1 billion, while high yield bond issuance enjoyed a notable uptick, jumping by more than 20 per cent to €95.5 billion.
At the same time, the picture emerging from the data is one of a bifurcated market, highlighted by the fact that almost all leveraged loan issuance was for credits rated B or higher, with negligible interest in credits with lower ratings.
Similar dynamics were observed in the high yield bond market, where issuance for bonds rated B+ or higher was almost three times higher than that for credits rated B or lower.
Lenders are increasingly putting credit in the spotlight, willing to accept loose covenants and aggressive pricing for good credits, while questioning documentation and pricing for more difficult credits. The pressure is on to find deals that balance higher yield with potential risks.
Finding new routes to yield
Collateralised loan obligations (CLOs) offer one potential path to higher yield, and the market is taking note. New-issue volume of CLOs reached more than €30 billion in 2019, a post-crisis record and 11 per cent higher than the year before.
€300 billion
Overall European leveraged finance
for 2019
The fourth quarter of 2019 was particularly active for European CLOs, with €8 billion in issuance, a sign that this trend is likely to continue. Refinancing/Repricing, which secured €50.8 billion of institutional loan issuance in 2019— up 32 per cent on the previous year—has been a major driver of this activity, as CLOs search for ways to invest their capital.
CLOs are also opening new paths for interested investors, in the form of sustainable CLO markets focused on the UN's Sustainable Development Goals (SDGs). Will 2020 be the year we see a rise in 'SDG-positive' broadly syndicated loan CLOs that exclude investments based on sustainable environmental, social and governance standards?
Searching for regional and sector hotspots
The European leveraged finance market is also flexing its muscles across the continent, with Spain's growth in this arena making particular waves. Leveraged loans in the country totalled more than €23 billion in 2019—almost double the issuance for 2018 and the highest values seen in five years.
The larger deals that have come through in 2019, from KKR's takeprivate of pizza group Telepizza to Spanish telecoms group MásMóvil's refinancing activity, confirm the country's maturity and ability to handle a larger share of the market.
As maturity levels continue to grow in these markets, investors may see new pockets of potential emerging in the months to come.
On the European sector front, meanwhile, the focus on credit quality comes into sharp relief.
For example, the pharma, medical and biotech sectors were the second most active leveraged loans issuers, in aggregate, accounting for 14 per cent of deals, but only 3 per cent of high yield issuance. There is a similar imbalance in the financial services sector, which made up only 5 per cent of European leveraged loan issuance in 2019, but 16 per cent of high yield bond activity.
Leveraged loan and high yield bond investors alike are turning to 'safe bets' such as industrials and chemicals—which accounted for the largest share of loan activity (20 per cent) and high yield bonds (22 per cent). Sectors that are under pressure, from automotive to consumer retail, represented a far smaller proportion of deal activity in the European leveraged loan and high yield bond market. They will need to step up their game if they want to attract lenders in the next 12 months.
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