European Leveraged Loan Market ‘Hot’ Ahead of U.S. Election Risk
Leveraged issuers who are ready to raise debt should tap the market now ahead of macro risks including the U.S. election and possible interest rate rises, market participants said after speaking at the Euromoney European CLO conference in Barcelona last week.
“We’re telling clients to ‘go go now’ as the loans market is hot so it’s a good time to get deals done before the run up to the U.S. election and other macroeconomic issues bring further volatility,” Supriya Saxena, a managing director in UniCredit’s global syndicate team, said.
Europe leveraged finance issuance has reached about 45 billion euros ($50 billion) in 2016, surpassing last year’s levels of liquidity for the same period, Saxena noted. A wave of repricings, refinancing and other opportunistic transactions have come to market recently. These deals have been supported by ECB policies, sizable repayments and more than 190 billion euros of new CLO money in Europe this year, the UniCredit banker observed. There are at least 14 loan deals being syndicated in Europe at the moment, according to data compiled by Bloomberg, and a further 10 have allocated this month.
Loan documentation is getting looser and looser, enabling more bond-to-loan transactions, Thierry de Vergnes, Global Head of Debt Fund Management at Lyxor Asset Management, said in a separate interview at the conference.
Netherlands-based TMF Group and Sweden's Unilabs Diagnostics AB were examples of recent loan deals where proceeds have been earmarked to refinance outstanding bonds. Bank of America Merrill Lynch strategists said in a client note dated September 21 that high-yield bond supply is 35 percent down year on year, with so-called "cov-lite" loan financing growing in popularity.
A combination of loose terms and low interest rate raises questions about what the recovery rate will be for borrowers that underperform, de Vergnes added. Loan popularity is also highlighted by an expanding investor base: in addition to insurance companies and pension funds, it now includes family offices, lured by attractive yields, he said.