Leveraged loan volumes in the European market totalled €58 billion in the first half of this year, according to a report from Marlborough Partners. That’s almost double last year’s amount over the same period, further demonstrating a continued trend of “too much money chasing too little product”.
Refinancings and repricings continued to dominate the European loan market as spreads continue to tighten with borrowers seizing on the financing opportunities. Total leveraged finances in the first half were almost two times the amount completed in the same period in 2016. In the UK alone, leveraged loans reached €6.2 billion in the second quarter.
Average term loan spreads dropped to 368 bps in the UK and in Europe they were recorded as 375 bps. “This ongoing trend of tighter spreads is driven by strong underlying market conditions and the imbalance in supply and demand,” said the report.
Direct lending funds continue to increase their presence in the German market, the report noted. Alcentra provided a €135 million unitranche to back the buyout of education service provider Schulerhilfe by Oakley Capital – a record for the German market. Barings, BlueBay, Pemberton and Permira have all been active in the German market this year.
In November, the European Central Bank’s leveraged finance guidelines are due to come into effect. Under the proposals sponsored-back transactions with a leverage multiple higher than 6x “should remain exceptional” and “form part of the credit delegation and risk management escalation framework of the credit institution”.
While the guideline does not prohibit the institutions regulated by the ECB to provide debt at 6x leverage levels, it introduces restrictions which are expected to push more leveraged transactions into the direction of private debt funds. This was the effect in the US when similar regulations were introduced by the US Federal Reserve in 2013. A recent report showed the volume of loans issued by regulated banks fell by 11 percent after the regulation was introduced.
“It is likely there will be a further boost to growth in non-bank lending in Europe. Whilst the direct lending market in Europe has been rapidly growing due to inroads predominantly being made in the mid-market, there should be an expectation that PIK or more equity like instruments such as prefs will become more common-place with the guidance,” the report said.