A new decade starts with optimism and a strong pipeline, to build on the resilience of an ever-maturing market.
As we enter the new decade, the resilient European leveraged finance market continues to grow and mature. The market is agile and has continued to deal with significant changes, ranging from the mix of leveraged loans and high yield bonds to the impact of direct lenders, sectoral and regional changes, as well as politics across Europe, including considerations relating to Brexit.
Against that backdrop, we begin 2020 with a pipeline of approximately €36 billion, nearly 70 per cent higher than 2019, year-on-year. Pricing is at an attractive level for borrowers, with the lowest high yield bond pricing levels for new issues in recent times; cov-lite has taken hold of the market; restructurings are at low levels; and a platform for social change, led by the UN Sustainable Development Goals, environmental, social and governance standards and investor sentiment, all point towards great market potential.
These trends are also penetrating more sectors, regions and deal types, as several countries see ‘deal firsts’ as trends flow across borders, and leveraged finance processes support alternative deal structures from traditional LBOs, to move into, for instance, the public-to-private space, with increasing pace.
Still, potential bumps in the road—central bank action causing interest rate hikes, the impact of the coronavirus outbreak (both in China and globally), full details of Brexit and the finalisation of trade deals across the globe—will all have details which will affect the market, but the market is better placed than ever to deal with these factors, as industry professionals put to work their experience of recent years in growing the market to good effect.
Selected European leveraged loan and high yield bond markets by volume and value
The Spanish leveraged finance market went from strength-to strength in 2019, with a selection of large deals and the market’s capacity to execute complex deal structures pushing issuance to four-year highs.
High yield offered few surprises in 2019, but the leveraged finance market in Spain has enjoyed a particularly good year, boosted by several larger deals and significant activity in the mid-market, which is the biggest market in the country. The market has matured, grown
more sophisticated and, as far as investors are concerned, is more closely aligned with Western European trends than ever before.
By the end of 2019, Spanish leveraged finance issuance (loans and high yield) totalled €27.7 billion across 64 deals. This was well ahead of the €15.7 billion issued during all of 2018 and the €20.7 billion of issuance in 2017.
Maturity matters
The market’s maturity is evidenced by pricing in Spain, where spreads have narrowed. In 2014, institutional Spanish loans were priced at 389 basis points (bps) versus 424 bps in the UK, 410 bps in France and 416 bps in Germany, according to Debtwire Par data. In 2019, Spanish loans were pricing at 342 bps on average, versus 381 bps in the UK, 407 bps in France and 396 bps in Germany.
The growth of Spain’s market is further reflected in the big-ticket deals the market has been able to digest and deliver.
KKR’s €602.23 million (US$667.5 million) take-private of pizza group Telepizza, for example, saw the investment firm start out with a standard bridge loan and revolving credit facility, with a view to refinance the whole facility through a €333.8 million (US$370 million) high yield bond priced at 6.25 per cent, according to Debtwire Par.
This deal was particularly notable in that the bridge loan was subject to English law, while the covenant package was subject to New York law. A few years ago, the Spanish market would have found it difficult to understand a complex structure like this. In today’s more sophisticated market, deals like these are no longer unusual.
Grifols is another prime example: The pharmaceuticals group secured a refinancing involving a term loan B (TLB) that sat alongside a high yield bond and a super-senior revolving credit facility. Spanish telecoms group MásMóvil, meanwhile, sought to refinance a convertible bond and simultaneously increase its debt in 2019 by combining a covenantlite loan with the issue of preferred equity.
While TLB structures were considered better suited to London and New York a few years ago, they are now viewed as another viable source of financing by banks and borrowers in Spain.
Spain enters new territory
Deal momentum is expected to carry the market in 2020, with airline operator IAG’s €1 billion (US$1.11 billion) acquisition of Air Europa and a bidding war for Spanish Stock Exchange group BME both expected to tap into leveraged markets.
Despite the positive outlook and cov-lite characteristics of loan issuance, however, an uptick in restructuring activity is anticipated. Deals like the €1.8 billion (US$2 billion) issue for supermarket cooperative Eroski have already made a telling contribution to restructuring values. With the Spanish Socialist Workers’ Party winning the most seats in the November 2019 general election, rising taxes are also a distinct possibility and could weigh on both consumer spending and corporate cash flows
While acquisitions are in the pipeline, the market may see more restructurings by Q3 and Q4 2020, running in parallel with acquisitions. This is new territory for Spain, and should make for an interesting year ahead.
"The leveraged finance market in Spain has enjoyed a particularly good year, boosted by several larger deals and significant activity in the mid-market, which is the biggest market in the country."
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
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An almost 25 per cent drop in European M&A deal value to €642 billion in 2019 on the previous year, according to Mergermarket data, saw leveraged loan issuance for buyouts (LBOs, MBOs and SBOs) and corporate M&A slide during the year.
Proceeds used for M&A (excluding buyouts) were more or less level with 2018 at €36.7 billion. The fall in buyout issuance, however, was pronounced, down more than 30 per cent to €38.7 billion on figures for 2018. The drop in headline M&A activity has seen a shift in leveraged loan issuance patterns towards refinancing and repricing, which accounted for an increasing share of issuance through 2019. Issuance for repricing and refinancing was just 3 per cent lower than 2018 at €94 billion and remained substantially higher than issuance figures for buyouts and general M&A.
€38.7 billion
The value of European buyout issuance in 2019
The fact that M&A was down in 2019 did not stop leveraged loan investors from looking for ways to deploy capital. The situation created opportunities for borrowers to return to the market and refinance or reprice loans.
Leveraged loan investor demand has been a major driver of activity for repricing and refinancing activity. CLOs, for example, raised €30.1 billion in new capital from investors during the year, according to Creditflux data, which is up on the €27.2 billion secured in 2018.
With leveraged loan investors actively looking for ways to invest their capital, their appetite for repricing has been strong. Repricing occurs when loans come out of their call periods and the market is there to support them. Given the significant demand from leveraged investors, borrowers can refinance an existing tranche with cheaper debt on the same terms with the same quantum of finance.
Similar dynamics are at play with respect to refinancing, with borrowers taking the opportunity to refinance in a hot market and extend loan maturities, and potentially take advantage to refinance on more favourable terms.
Borrowers have also noted the opportunity to push out maturity walls on loans, or taken the view that the benign market will allow them to secure looser terms and provide more flexibility.
With investors eager to deploy, borrowers can refinance relatively painlessly. This is more straightforward than trying to renegotiate terms on an existing tranche, which may require the consent of all affected lenders.
Looking ahead, there are hopes that a revival of European M&A activity, prompted by a clearer direction of travel on Brexit and less volatility around global trade, will support a corresponding rise in leveraged loan issuance
Looking ahead, there are hopes that a revival of European M&A activity, prompted by a clearer direction of travel on Brexit and less volatility around global trade, will support a corresponding rise in leveraged loan issuance. Default rates remain in the 1 per cent to 2 per cent range and, with interest rates unlikely to rise, there is still demand for leveraged loan paper.
European markets were dominated by Brexit in 2019. The first quarter was quiet and, although things started to move again in the middle of the year, borrowers and lenders remained cautious. Although Brexit was viewed as a UK issue, the EU was just as invested. Many of the CLOs, investors and pan-European firms sit in London and would have felt the effect of negative Brexit sentiment.
With the general election at the end of 2019 returning a majority government committed to leaving the EU, there is less uncertainty in the market, and the immediate risk of a no-deal cliff edge has receded in the short term. It is hoped that this will allow for a return to business as normal, a revival of M&A and a consequent rise in leveraged loan issuance.
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European leveraged debt in focus (PDF)
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European leveraged loan issuance use of proceeds, 2019 (PDF)
