The great transatlantic loan divergence – who’ll take the lead?

The US leveraged lending market has been leading Europe in terms of attractiveness for the past several months, with the yield gap widening substantially. The two markets are likely to converge again – but will the lending that has increased US yields spread to Europe, or will there be a resurgence of liquidity stateside?

For the last few years, lending in Europe has been more attractive than investing in US leveraged loans. And that’s been true whether you’re speaking about the syndicated loan market or the more illiquid mid-market. But US yields surged past European ones in the last quarter of 2015. 

Average yield to maturity in the US leveraged loan market is now just shy of 7 percent, according to the S&P/LSTA Leveraged Loan Index. While the S&P European Leveraged Loan Index puts average European loan yield to maturity at just over 5 percent. 

The difference is most obvious in loan deals being shopped either side of the Atlantic. The syndication of almost $6.5 billion in loans backing JAB Holding’s acquisition of single serve coffee maker Keurig Green Mountain is a great example of how US lenders are pulling back while the Europeans have as much appetite as ever.

The vast majority of the debt, $6.125 billion, has been offered to US investors but one London-based loan investor told PDI that the euro-denominated term loan B for Keurig was about 4x oversubscribed while the US dollar tranches are struggling. 

A global debt manager also told PDI that it was focusing all its efforts on a strong pipeline of attractive US deals, virtually ignoring Europe for the moment because their mandate is to seek the best relative value. They will even relocate European staff to the US temporarily (or longer) to support the pivot in activity. 

Wider market volatility often brings loan market opportunity. But how will this pan out?

As this column noted a couple of weeks ago, mid-market private debt providers are looking to take advantage of the reverse-flexing and syndication risk associated with the bank-led loan market to obtain mandates. And more immediately, others are seeking to buy cheap paper in the secondary market. 

That is the short-term impact, longer term though, it is not clear whether US and European market convergence will come from the nervousness evident in North America affecting Europe. 

Could slowing European pricing cause average yields to more closely mirror those in the US? Or will US investors rediscover their appetite as more M&A deals come to market and the focus returns to making money?

For now, there’s very little sign of Europe following the US’ spike in yields. In the syndicated loan market, around 12 deals have launched and the high yield bond market even reopened this week with Italian ferry company Moby getting set to refinance

The longer the US market remains fractious, the more likely Europe is to follow in its footsteps. For yield-hungry loan investors and deal-hungry debt managers, that sounds attractive. But tougher markets for issuers coincide with higher default rates – debt managers currently capitalising on dislocation should look to their portfolios.