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IPE special report May 2018

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High-yield sees record issuance as European markets ease terms

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Issuance of high-yield and leveraged loans reached record levels in 2014, backed by change in the way deals are structured for investors.

A report, ‘The changing face of international leveraged debt’, by law firm White & Case said these record levels came as market makers experienced strong demand, aided by a convergence in deal structure between the US and Europe.

The law firm said European corporates had adopted “US-style” terms, making deals less restrictive and more borrower-friendly.

“European corporates and sponsors now have a broader range of financial products available to them than ever before.

“High yield’s emergence as a competitor to bank finance as a primary source of capital, the growth of alternative capital providers and new structures for the legacy loan market all contribute to increasing choice for borrowers,” the report said.

European leveraged loan allocations reached €116bn in 2014, an increase from around €80bn, and high-yield from from around €83bn to €97bn as US issuance also grew, albeit at a slower pace.

The report described recent changes in the European leveraged debt market as a “huge upheaval”, with new legal precedents in covenants and incurrence-based covenants.

White & Case said the European market would continue its growth, as 2014’s low-yield environment continued with companies refinancing bonds in call periods at much lower coupons.

David Becker, a partner, said: “It is coming of age now as its investor pool has become increasingly sophisticated, providing funding across the loan and bond spectrum.”

More M&A activity across the world also helped fuel the leveraged loans market while high-yield issuance in the second quarter of 2014 was 90% higher than a year earlier, with a 116 deals from a year total of 269.

In the first half of the year, values and volumes were higher in most Western European countries, the report said, with the UK & Ireland leading high-yield issuance and France leveraged loans.

The second quarter was the busiest period in both asset classes as investors clamoured into high-yielding fixed income.

However, the retreat of banks, often cited as a growth factor in the markets, also began to cause concern among investors as Q3 began.

European pension funds were among those moving into sub-investment grade corporate debt as investment managers became concerned over liquidity in the market and pricing bubbles forming in the first half of the year.

At the start of Q3, Mike Karpik, chief executive at State Street Global Advisers, described the high-yield market of showing “pockets of euphoria” with liquidity in the market a major concern.

UBS Global Asset Management also began to change the structure of its tacitical asset allocation strategy with liquidity a key concern.

These concerns were demonstrated in market volumes with Q2 saw peak issuance for both high-yield and leveraged loans in Europe, a factor not seen in the US, or in previous years within the continent.

Issuance fell for the remainder of the year but still supported the record-level market.

For more on the high-yield bonds, read IPE’s previous coverage of the market

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