European leveraged loan issuance ‘resilient’, says study

Fitch Ratings said that the performance of European senior secured loans held firm during a summer of market volatility.

Both the pace of new issue supply and credit performance in the senior secured loan market remained healthy during the summer, according to the latest European leveraged loan chart book from Fitch Ratings.

Long-term funding from collateralised loan obligation investors and institutional investors offering separately managed accounts insulated the leveraged loan secondary market from public market volatility, supporting stable primary market demand, the ratings agency concluded.

The volume of leveraged loans issued as of end August 2015 has fallen compared to last year though, reflecting both the scarcity of assets and the on-going competition for assets. Financial sponsors face stiff competition from trade buyers and the public markets in their search for companies to take-over via leveraged buyouts (LBOs).

Enterprise value (EV) multiples have returned to pre-crisis 2007 levels and credit markets are offering rising leverage and looser terms. Financial sponsors remain less able and willing to compete against trade buyers, Fitch said. Though there are signs that stock markets too are becoming more reluctant to pay premium EV multiples for new listings of corporate assets, the research suggested.

Furthermore, sponsors have responded to the lack of deal flow by adopting the same tactics as trade buyers by pursuing mergers and acquisitions (M&A) among their portfolio companies as in the recent combination of French private hospital chains Vedici and Vitalia by private equity firm CVC.

Fitch expects new issue volumes to reach up to €35 billion by year-end 2015 and €50 billion in 2016.

Most new issuance represented small issuers, Fitch said. The number of debut single B-rated issuers in the leveraged loan market outpaced that in the European corporate high-yield bond market, amid Eurozone and global market volatility which contributed to secondary market spread widening and high-yield funds outflows.

Deterioration in underwriting standards and an increasing number of small issuers has translated into a weaker credit quality in Fitch’s leveraged credit portfolio, as 50 percent of outstanding issuers are rated at B- or below as of end-August 2015 versus 40 percent at the beginning of 2014.

However, the share of “at-risk” issuers rated B- with a negative outlook or below continues to decrease, Fitch said. Thus the rating agency expects default rates to remain low in 2015, supported by long-dated debt maturities falling due beyond 2020.

Fitch's research is based on a portfolio of private credit opinions, private ratings and public ratings on about 440 European leveraged credits primarily LBOs, representing roughly €380 billion of committed senior and junior loan debt.