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European leveraged finance: From survive to thrive

What's inside

European leveraged finance markets rebounded in the past 12 months, driven  by enthusiastic refinancing activity and a resurgent M&A marketplace, setting the  stage for a healthy year ahead

Foreword

European leveraged finance markets look remarkably healthy as we enter 2022. This may come as a surprise, after 12 months of economic volatility underpinned by everything from a new COVID-19 variant to growing inflationary pressures. What does this mean for the months ahead?

The start of the new year is full of positives in the European leveraged finance market. There has been a clear shift from survival to growth strategies among lenders and borrowers, setting the stage for significant activity in almost all sectors.

The numbers paint a clear picture. European leveraged loan issuance climbed more than 25% in 2021, year-on-year. High yield bond markets in the region were even more enthusiastic, with issuance for the year up 47% on 2020's total.

Ongoing government support in the EU and the UK helped companies that might otherwise have fallen victim to the pandemic stay afloat. Low interest rates and pricing sparked a wave of refinancing. CLO activity—most of which was intended for refinancing and resets—pushed new CLO issuance up by 75% year-on-year. 

A bottleneck of demand as well as significant private equity dry powder also brought a flood of new deal money into the market. Companies that were once hesitant to sell encountered enthusiastic buyers aggressively looking for targets. Buyers, meanwhile, found themselves in a better position to judge whether a potential target was likely to struggle or grow in 2022 and beyond. Lenders reaped the benefits, with high deal volume in which to participate. At the same time, unlike many other industries, European direct lending funds avoided any significant downturn in deployment and deal activity due to COVID-19. According to data from Debtwire Par, direct lending issuance in the region reached €36.2 billion in 2021, surpassing 2020's full-year total of €21.4 billion. This provided a liquid and competitive market for finance products.

Possibilities and pitfalls

Set against this positive backdrop, does the future look entirely bright for leveraged finance? Not necessarily—some challenges remain, and each may have an impact on European issuance. 

For example, climbing COVID-19 case numbers driven by the Omicron variant may convince some corporates to hold on to their reserves. Any resulting new lockdowns or restrictions could also be the final straw for businesses that have already struggled during the pandemic.

Inflation and attendant interest rate rises are also likely to influence potential borrowing decisions in the coming months. The UK got the ball rolling with its first interest rate rise in three years in December 2021, and the EU may follow suit in 2022—despite claims to the contrary by the European Central Bank. 

Any rise in the cost of debt will affect M&A and buyout activity, as well as financing. Some may pause while others—from corporates in good financial shape to PE firms with money to spend—may decide to invest in a post-COVID-19 future. Either way, M&A and buyout deals in the pipeline already suggest that issuance will remain healthy in the first half of the year at least.

And, finally, environmental, social and corporate governance criteria will be on the menu for every European business. New benchmarks due in 2022—from the EU's Sustainable Finance Disclosure Regulation to the European Leveraged Finance Association's updated Sustainability Linked Loan Principles—are already making lenders and borrowers sit up and take notice. 

All this activity means the stage is set for companies hoping to thrive rather than simply survive. Lenders chasing higher-yield opportunities will be on the hunt for new investments, and borrowers can be expected to provide lenders with a healthy volume of demand for debt financing in 2022.

From survive to thrive: European leveraged finance looks to the future

  • European leveraged loan issuance was up by more than a quarter, year-on-year, to €289.7 billion in 2021
  • High yield issuance reached €148 billion in 2021, up 47% on 2020 (year-on-year)
  • Refinancing accounted for approximately half of overall leveraged loan and high yield bond issuance for the year
  • Both M&A and buyout activity saw double-digit year-on-year rises in deal-related issuance
Hitachi Energy

Five factors driving leveraged finance in 2022

  • Supply chain risks are going to be of increasing concern for lenders 
  • Inflation and interest rate rises may influence deals, even if they do not shift the market
  • Private equity (PE) is still on a spending spree that will influence debt market decisions
  • Lenders searching for yield will finance riskier credits on the right terms
  • Terms and documentation will continue to be influenced by credit quality, sector and rating
Sunrise in the Quartier de la Défense

M&A financing keeps the leveraged finance market beating

  • European leveraged loan issuance for M&A (excl. buyouts) climbed 19% year-on-year, reaching €54.9 billion in 2021 
  • High yield bond issuance for deals jumped to €17.8 billion in 2021, a 53% gain on 2020 
  • European M&A deal value came in at US$1.3 trillion in 2021—just shy of the record set in 2007 (US$1.4 billion)
Aerial view of the skyline of Frankfurt at sunrise

Buyout momentum paints a strong picture for issuance in 2022

  • Buyout deal value in Western Europe hit an all-time record high by the end of 2021, more than doubling year-on-year 
  • Private equity (PE) activity supported an 81% uplift in buyout loan issuance year-on-year, climbing to €66.7 billion in 2021 
  • High yield bond issuance intended for buyouts reached US$15.4 billion in 2021—more than double 2020's total
Sun rising over Tower Bridge

European CLOs and the unstoppable impact of ESG

  • New European collateralised loan obligation (CLO) issuance in Europe is up 75% year-on-year, reaching €38.5 billion in 2021
  • CLO issuance intended for refinancing and resets came in at a record €57.5 billion for the year
  • By July 2021, 34% of the EU's total assets under management was compliant with the region's new Sustainable Finance Disclosure Regulation (SFDR), and this is expected to climb to more than 50% in 2022
high-rise buildings

From recurring revenue to sticky customers: The trends driving tech sector issuance

  • Leverage loan technology and computer-related issuance in Western and Southern Europe almost doubled from annual pre-pandemic levels to €19.9 billion by the end of 2021
  • Technology and computer-related high yield bond issuance in the region hit an all-time high of €7.3 billion by the end of 2021
  • Start-up debt issuance in Europe had already reached a record annual total before the end of Q3 2021
sunset over the bridge

US versus Europe: Will their shared path continue in 2022?

  • In the US, leveraged loan issuance for 2021 reached US$1.4 trillion, a 63% increase year-on-year
  • The high yield bond market in the US was relatively flat, rising from US$428.3 billion in 2020 to US$429.7 billion in 2021
  • In comparison, in 2021, the leveraged loan market in Western and Southern Europe increased by 28% year-on-year to €289.7 billion
  • The region's high yield bond market during that period was up 47% year-on-year to €148 billion
The skyline of Frankfurt is reflected on the river main at sunrise

European leveraged debt in focus

Selected European leveraged loan and high yield bond markets by volume and value

 

Conclusion

A flurry of activity saw year-on-year leveraged finance issuance in Europe hit new heights in 2021. Can this pace be maintained in the months ahead? Based on pipeline activity and investor appetite for growth, the answer seems to be: Yes.

sunset over the arch bridge
Sun rising over Tower Bridge

Buyout momentum paints a strong picture for issuance in 2022

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HEADLINES

  • Buyout deal value in Western Europe hit an all-time record high by the end of 2021, more than doubling year-on-year 
  • Private equity (PE) activity supported an 81% uplift in buyout loan issuance year-on-year, climbing to €66.7 billion in 2021 
  • High yield bond issuance intended for buyouts reached US$15.4 billion in 2021—more than double 2020's total 

A record-breaking year for PE deal activity in Europe supported a surge in leveraged loan and high yield bond issuance for buyouts in 2021, and points to a busy year ahead. 

PE deal value in Western Europe in 2021 surpassed record annual highs posted more than a decade ago. Buyout deal value in 2021 totalled US$441.2 billion, more than double the total recorded in 2020. Deal value soared, as PE firms pursued transactions to put deployment timetables that were delayed due to COVID-19 back on track and invest the €185 billion mountain of dry powder available for European deals alone.

Reopening economies and improving growth prospects encouraged dealmakers to take on deals of increasing size—according to Mergermarket data, there were more than 50 buyouts valued at more than €1 billion in Western Europe in 2021. This trend may well continue in 2022 as firms continue to make up for lost time and capitalise on new opportunities.

Buoyant buyouts boost debt markets

As PE deal activity has rebounded and managers backed more mega-deals, leveraged loan and high yield bond issuance for buyouts has also bounced back, despite the pandemic's ongoing disruption with the emergence of the Delta and Omicron variants. 

81%+

PE activity supported an 81% increase in buyout loan issuance in 2021, year-on-year

As PE deal activity has rebounded and managers backed more mega-deals, leveraged loan and high yield bond issuance for buyouts has also bounced back

Leveraged loan issuance for buyouts in Western and Southern Europe climbed 81% year-on-year, from €36.8 billion in 2020 to €66.7 billion in 2021.

High yield bond issuance for buyouts has been even more robust, doubling its 2020 tally to reach €15.4 billion in 2021. Both leveraged loan and high yield issuance intended for buyouts had already cleared the full year 2020 total by the end of Q3 2021, according to Debtwire Par.

The higher volume of €1 billion-plus deals in 2021, including jumbo transactions such as the €12 billion take-private of UK supermarket retailer WM Morrison by Clayton, Dubilier & Rice (CD&R), has proven especially beneficial for European leveraged finance activity levels. 

With average EBITDA multiples for median buyouts across all sectors rising from 12.3x in 2020 to 12.8x in 2021, according to Mergermarket, large deals like the CD&R/Morrisons tie-up will see a series of multibillion-euro debt packages come to market for financing.

This combination of higher valuation multiples and a rising number of jumbo deals in Europe is significant for lenders. Even though total leverage ratios in European debt structures have held steady in the 5.1x to 5.7x EBITDA range going back to 2017, the absolute amount of debt that PE dealmakers require to fund their structures increased in line with higher entry valuations and bigger deal sizes.

Buyout issuance in Western and Southern Europe also accelerated through the year, as refinancing activity cooled following a frenetic first half of 2021. European refinancing loan issuance, for example, climbed more than four-fold between Q4 2020 and Q1 2021, as a cluster of borrowers saw the strong lender appetite in the market and moved quickly to refinance existing debt packages at lower rates.

Moving into the second half of the year, however, refinancing issuance slowed, dropping by approximately a third between Q2 and Q3 2021. A gradual rise in pricing also made refinancing less appealing through the course of the year—average margins on first-lien institutional loans in Europe climbed from 3.71% in Q1 2021 to 3.84% in Q4 2021.

Slowing refinancing levels, however, have been a boon for buyouts, as lenders and syndication desks had more bandwidth to work through the pipeline of financing opportunities. Recently closed buyout financing deals include Italian industrial waste recycling business Itelyum locking in a €450 million senior secured high yield bond package following its acquisition by PE firms Stirling Square and Deutsche Beteiligungs AG, and Swedish building maintenance company Polygon landing a €485 million institutional loan financing following its secondary buyout by AEA Investors from European buyout house Triton.

Positive pipeline

There is little sign of the market slowing down in the months ahead. Buyout financing momentum continued apace in the final quarter of 2021, with the portion of the loan market earmarked for buyout financing climbing to an all-time high by October 2021, according to Debtwire Par. And some €6.5 billion of the €8.5 billion of institutional loans in syndication in Europe at the time stemmed from LBO transactions.

With some PE deals struck in 2021 still looking for financing as well as the completion of a bundle of auction processes that will also tap debt markets, involving the likes of Serrala and CeramTec, leveraged finance investors will be kept busy for some time yet.

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2022 White & Case LLP

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