Leveraged loan issuance falls by a quarter

A drop in leveraged loan issuance collides with record-high leverage multiples in the US and weaker covenants in the European mid-market.

Total leveraged loan issuance in both the US and Europe fell by 25 percent in the first three quarters of 2015, compared to the same period last year.

US issuance dropped to $346.5 billion, down from the equivalent figure of $462 billion for the year previous, as of 30 September 2015, according to S&P Capital IQ LCD. European issuance declined to €48.9 billion from $65.2 billion on the same period for the year previous.

Mid-market leverage in the US has also hit a record high, according to S&P Capital IQ LCD in Forbes.

It climbed to 5.6x in the third quarter from a previous high of 5.3x set in the third quarter of 2013. Senior leverage reached 5.5x, also beating the prior record of 5.2x. The figures relate to deals where borrowers generate $50 million of EBITDA or less.

At the larger end of the market, US LBO leverage also reached a new high during the third quarter, at 5.9x, beating the 5.8x record set in the third quarter of 2007.

Average total leverage multiples during the first three quarters of 2015 in the US are higher in mid-market leveraged loans than in large-cap leveraged loans, according to S&P Capital IQ LCD data. However, they are slightly down on the same period last year, at 4.89x compared to 5.02x in the mid-market and 4.72x versus 4.87x in the large-cap market. 

A weaker deal pipeline in the third quarter, liquidity from private equity sponsors and trade buyers plus increased competition between banks and private debt funds, have all been cited as reasons for the more aggressive terms, market sources say. 

However some believe that increased merger and acquisition activity could ease pressure on the pipeline.

“All are waiting for big-cap M&A to act as a catalyst for future primary deal flow for sponsors,” one banker said.

During the course of the year, key traditional protections of European loan documentation have also weakened and permeated down into transactions in the mid-market, Debt Xplained said in a recent report.

Covenant-lite and covenant-loose loans, historically more common in large-cap US deals, are now a common feature in Europe, even in sub-€250 million loans, and further weakening is likely to follow, the report continued.

The traditional four financial maintenance covenant package now appears in a small minority of sub-€250 million transactions, at less than 25 percent in 2015 down from more than 90 percent in 2013.