The maturity wall has been partially dismantled, but a sizeable volume of debt remains: more than €1 trillion is likely to be refinanced over the next three years, according to Debtwire’s latest report on the European refinancing market.
The €70 billion of high yield bonds issued in 2012, coupled with the outbreak of ‘amend and extend’ negotiation, have eased concerns over an overcrowded refinancing market, as heavily-indebted European companies take significant steps to deleverage.
Debtwire canvassed the views of 50 market participants in the sponsor and lender communities, and found that concerns remain over the gap left as banks switch to deleveraging mode and CLOs move to repay investors. The refinancing challenge therefore remains a significant one.
“It appears that most borrowers now recognise the scale of the refinancing challenge that still remains and appear to be more in line with lenders’ expectations,” explained Klaus Kremers, a consultant at Roland Berger Strategy Consultants, which sponsored the report along with Freshfields Bruckhaus Deringer.
The report, launched on Thursday, argues high yield funds armed with unstoppable inflows are “soaking up record amounts of issuance in loan-to-bond refinancing deals,” while newly established alternative credit funds and some private equity groups are stepping into the growing financing breach in the mid-market.
“In the last three years we have only seen an increase in accumulation of debt and no significant debt repayment,” added a Polish corporate borrower cited in the report. “In the next three years we will see all the debt refinanced rather than repaid and this will continue unless the market improves significantly.”
There is likely to be a spike in refinancing activity in the next 12 months, the report predicts. Corporate respondents said 40 percent of the debt they planned to refinance matures next year, while for private equity participants, the figure was 44 percent. Interestingly, private equity borrowers appear to have much more manageable debt loads over the ensuing years however, with 12 percent of debt maturing in 2015, and 4 percent in 2016, compared to 44 percent and 4 percent for corporates.
Impending maturities were cited as a factor in refinancing by 68 percent of respondents (24 percent said it was the primary reason). In last year’s report, 44 percent said it was the primary factor in their decision to refinance, suggesting borrowers feel under less pressure from impending maturities. Refinancing debt at lower cost was cited by two thirds of respondents as a reason (22 percent said it was the primary reason).
‘Amend and extends’ were the preferred option for borrowers looking to refinance, with 60 percent choosing that ahead of refinancing using new or existing lenders.
Banks remain the key providers of capital, the report found, ahead of the bond markets. The report did however find 10 percent of respondents thought non-bank lenders would be the primary source of debt in a refinancing situation, while 58 percent thought they could play a role.
“Private equity firms, credit funds and other alternative capital providers have very significant amounts of capital available and are taking increasingly large direct lending positions,” said Alex Mitchell, a partner at Freshfields Bruckhaus Deringer. “They have an advantage over banks in the current regulatory environment and we expect them to be a key source of funding for refinancings in the coming years.”
The impact of the sovereign debt crisis in Europe has been keenly felt. Nearly three quarters of respondents said funding costs had risen as a result of high secondary market trading volumes in response to sovereign debt concerns. Almost half felt the main impact had been the reduced opportunity to refinance caused by periodic shut-downs of the debt markets.
Over a third of lenders surveyed expected more than €20 billion of European debt to be refinanced in the US market in 2013. Meanwhile, more than a third of lenders said that Germany will account for the largest share of refinancing; only a quarter of respondents expect the UK to account for the largest number of refinancing.
Senior secured and unsecured bond structures are increasingly becoming the preferred route to refinance in the next year, according to nearly half of respondents.
Timing a refinancing to avoid sovereign risk volatility and achieving optimum market conditions was the biggest challenge when refinancing, respondents said. Covenant pressures were also a key factor.
“How far the current market will sustain optimal conditions is not known. Considering the volatile history of the European economy in the last four years and frequent changes in the banking system I think it is very difficult to get the right timing for refinancing,” suggested a German private equity borrower.