Leveraged loans hit all-time high

Unprecedented bank and CDO appetite for leveraged loans in Europe has allowed issuance in the first half of 2004 to soar to an unprecedented €35.4 billion.

The leveraged loan market in Europe is enjoying its busiest year yet, enabling buyout activity to continue apace.

According to Standard & Poor’s, leveraged loan volume in the first six months of 2004 totalled €35.4 billion, the highest ever since the rating agency started tracking issuance volumes in 1999. In 2003, first half lending reached €24.4 billion ahead of an annual total of €48.1 billion. 

The main beneficiaries of the lending boom, alongside the telecoms sector, were private equity backed LBOs, S&P said. LBO loans during the six months accounted for €23.9 billion, up from €14.3 billion issued in the first half of last year and just short of the total €29.6 billion issued in all of 2003.  The data was compiled by S&P's European Structured Finance Ratings Group and Standard & Poor’s LCD.   

Driving activity in the loans market are banks and CDO funds, which continue to provide an unprecedented level of liquidity to the market. “Barring a major credit event,” the agency said, the market considered an imminent shift in investor appetite unlikely. This was in part because prepayment levels were also high due to a “constant stream of early recaps, a pick-up in IPOs, […] trade sales and secondary buyouts.” 

However, the report also said that, “while market capacity is undoubtedly at an all-time high, some bankers feel that aggressive deals for less attractive credits, which may have raised oversubscriptions in the first half, could stumble later in the year.”

The agency cited two European private equity backed credits as examples of deals that some market practitioners considered in danger of failing to support their capital structures. S&P said some lenders were “spooked” by Candover-owned hygiene product maker Ontex, “with its lower-than-expected trading performance.” Lenders also worried about Global Garden Products, backed by ABN Amro Capital, which recently “sailed close to stretching covenants amid difficult trading conditions.”