Headwinds for European leveraged loans hampered Q4

With issuers deterred by volatility and investors beginning to push back against bad terms, high yield bonds and leveraged loans took a dive in the final quarter of last year.

As global financial market volatility increased, the fourth quarter of last year saw a steep fall in European high yield bond and leveraged loan activity according to Debtwire Par, the fixed income data and intelligence provider.

Total high yield bond issuance fell to a little over €9 billion during the quarter, compared with just over €71 billion for the year as a whole, as borrowers deterred by uncertain macroeconomic conditions opted to take “a wait and see approach until the new year”, according to Colm Doherty, Debtwire’s global head of primary market analysis.

The leveraged loan market fell to €203 billion in 2018 as a whole, down 28 percent from the €282 billion recorded the previous year. This was driven by a 44 percent decline in repricing and refinancing activity.

Volatility impacted pricing, with the average loan bid falling by 142 bps to 97.31 in Q4 2018 and the par-plus share dropping to 3 percent from 57 percent, with over half the price decline occurring in December.

The year as a whole saw larger and more aggressive EBITDA addbacks, Debtwire found. Total leverage on European deals rose to an average of 5.4x, up from 5.3x a year prior. The share of highly leveraged deals (6x or more) went up to 33 percent in 2018 from 30 percent in 2017. Due to bigger addbacks, leverage was even higher on an unadjusted basis.

Debtwire said 2018 showed some signs of lenders pushing back against borrower-friendly terms although “this marginal improvement was nowhere near reclaiming ground lost in recent years”.

“Looking ahead to 2019, loan and bond lenders will be focused on the macroeconomic and geopolitical backdrop, including Brexit, the US-China trade war and the European economic growth picture,” said Doherty.

After a very strong year in 2018, he predicted a decline in deal flow for CLOs in the year ahead.