The UK's vote to leave the European Union will have a limited effect on the issuance of leveraged loans in Europe, according to a statement released Friday (29 July) by Fitch Ratings.
Drawing on data from its latest European Leveraged Loan Chart Book, Fitch highlighted the fact that there has been little change in covenant structures or interest margin levels for the senior loan primary market in the weeks since the vote on 23 June. In addition, the ratings agency noted that, during the same period, CLOs have issued at lower spreads on senior notes.
The statement did recognize that the Brexit vote could dampen the pace of issuances for specific sectors including consumer-discretionary, real estate and travel. However, the report found the overall impact of the vote will be “limited” for leveraged loan issuance from single 'B' category European borrowers.
Single 'B' is Fitch's category for borrowers with a material default risk but a limited margin of safety.
“Given the relative post-referendum macro stability and credit market support from the [European Central Bank's] Corporate Sector Purchase Programme, Fitch expects private sector investors with long-term horizons will continue to embrace the high spreads and senior secured ranking of European leveraged loans,” the statement read.
Over the long term, however, Fitch warned that uncertainty stemming from the Brexit vote threatens to complicate conditions for borrowers with significant exposure to the UK domestic economy. This could result in an uptick in defaults among such borrowers.
“Not all borrowers in the at-risk portfolio will default,” Fitch wrote. “However, expected recovery for senior lenders remains under pressure from high senior leverage and reduced junior debt buffers in recent transactions.”