Lenders Can’t Be Choosers as M&A Chokes European Leverage Loans

  • Borrowers push back on $14 billion of deals this quarter
  • Buyout slump adds to feeding frenzy for trickle of issuance

Europe’s diminished band of leveraged loan borrowers are using the lack of competition to their advantage.

Sandwich chain Pret A Manger Ltd., ice cream maker Froneri Ltd. and 15 other companies have raised loans at lower rates than originally asked for this quarter as investors turn to risky assets to boost returns. The amount raised in so-called reverse-flex deals totaled 12.6 billion euros ($14 billion), the highest quarterly tally since Bloomberg started compiling the data in 2012.

There are “significant opportunities for borrowers to re-price deals and price new issues at very tight levels,” said Hoby Buvat, London-based co-head of EMEA leveraged loans at Deutsche Bank AG. “There is plenty of investor money out there.”

Borrowers have been able to extract cheaper deals because the total number of loans sold this year has slumped by almost a fifth, leaving investors fighting over the scraps. The decline has come as uncertainty over the U.K.’s vote to leave the European Union and weak economic prospects cool private-equity buyouts, which are typically funded with leveraged loans.

Sales of new loans have declined to about 57 billion euros this year, according to data compiled by Bloomberg. With fewer new assets to buy, investors have looked to the secondary market, where loan prices rose to as high as 98.2 cents on the euro on Tuesday, the most since July 2007, according to a Standard & Poor’s index.

The imbalance has been amplified by the arrival of non-traditional loan investors as yields on the safest bonds tumbled below zero because of European Central Bank stimulus.

Tighter Deals

“ECB policy is making it hard for investors sitting on cash,” said Kevin Foley, head of loan and high-yield capital markets, EMEA, at JPMorgan Chase and Co. in London. “It’s forcing them to put money to work to get yield. That is creating an issuer-friendly dynamic which is helping push pricing on deals tighter.”

European leveraged loans returned 5.5 percent in 2015, the seventh year of gains, according to an S&P index, and are set for third-quarter earnings of 2.3 percent. By comparison, euro-denominated notes lost 0.6 percent last year and this quarter’s returns are 1.9 percent, Bloomberg Barclays index data.

Borrowers may have a limited window of opportunity, with the U.S. general election in November and Italy’s constitutional referendum potentially stirring market volatility. A pick-up in M&A deals this month may also signal a rebound in loan supply. 

Stronger Hand

Before then, borrowers may be dealt an even stronger hand. Deutsche Bank’s Buvat forecasts more private equity firms will exit investments and repay existing loans, a trend that could flood the market with even more investor money.

Among those deals, London-based private equity firm CVC Capital Partners is selling Spanish hospital group Quironsalud for 5.76 billion euros and Nordic payments firm Nets A/S is being sold by Advent International Corp. and partners.

“New issue supply and demand is currently imbalanced, weighted towards demand,” said Benjamin Edgar, a London-based portfolio manager at Intermediate Capital Group, which has 22 billion euros under management.

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