Since reopening after the summer hiatus, European corporate-bond issuance has witnessed an uncanny lull. Issuers in the U.S. too have faced headwinds, on account of the increased secondary-market volatility and waning investor confidence.
Recent high-yield deals from both sides of the Atlantic have offered evidence of the pressures from the secondary market percolating to the primary market. In the US, telecom operator, Altice, tapped the market in order to fund its acquisition of Cablevision. Although the deal edged past the line, the issuer was pushed to pay up and truncate the issue size. In Europe, private-club operator Soho House had to withdraw its issue.
Standard & Poor’s Ratings Services recently published its quarterly leveraged finance report “Will Europe's Tough Speculative-Grade Bond Market Give Leveraged Loans A Boost?” which examines what this market slowdown could mean for the leveraged finance market overall in Europe. Although bonds still account for roughly half of the leverage finance issues in Europe, loan issuance has seen a marked pick-up since June, and companies may turn to the leveraged loan market where possible.
EUROPEAN SPECULATIVE GRADE CORPORATE ISSUANCE
Leveraged loan issuance could be supported by improving lending demand from banks, especially with the noteworthy improvements in their balance sheets since the financial crisis. And demand from collateralized loan obligations (CLOs) is strong, as they have been constrained by lack of assets, so an uptick in borrowers planning loans could boost supply. In addition, the publication of the European Commission's final Simple, Transparent and Standardised (STS) Securitization Regulation at the end of September has provided much-needed clarity to originators and injected confidence into this market.
The report also discusses how European corporate credit quality remains stable, apart from in certain sectors (including oil and commodities). Companies have been slowly deleveraging since the financial crisis, which has allowed private equity holders to exit transactions via IPOs rather than by selling to secondary buyers, whose bids haven't been able to compete. This is evident in the decreasing proportion of financial buyers in M&A activity by value in 2014 and 2015 to around 17%, as compared with 30% in 2013.
EUROPEAN TARGET M&A DEALS BY VALUE BY BUYER TYPE