Our thinking

European leveraged finance: COVID-19 and the flight to quality

What's inside

The European leveraged finance market remains resilient after a year of unprecedented hardship, as lenders dissect credits to determine the best possible deals, from pricing to documentary terms


As we enter 2021, COVID-19 continues to weigh on every decision, from our health to our work and our long-term plans and yet, despite these concerns, European leveraged finance markets have weathered the storm and remain positive about the year ahead

In March 2020, as lockdown restrictions took hold, the European leveraged finance markets ground more or less to a halt. Many feared the worst, as leveraged loan issuance dropped significantly that month and high yield bonds saw virtually no activity at all. Borrowers and lenders alike held their breath, shoring up their finances and waiting to see what might come next. And then, just as quickly, investor sentiment began to improve. By the end of Q2 2020, leveraged loan activity had returned almost to pre-pandemic levels.

And while it slowed somewhat in the latter half of the year, as new waves of COVID-19 swept across the UK and Europe, the final tally was up 11% on the year before—a remarkable achievement, confirming the market’s long-term resilience.

The story in high yield bond markets was equally impressive, ending the year up 10% on 2019 figures, with every indication that it will retain a larger share of the market in the months ahead.

What does all of this mean for 2021?

First and foremost, the influence of COVID-19 will continue to be felt, even as vaccines are rolled out across Europe. Sectors hammered by the first wave—including entertainment and leisure, hospitality, retail, oil & gas and aviation—will struggle to secure financing, having already done what they can to survive. Within those sectors, those that require financing and are able to secure deals are likely to have to pay for the privilege, with leveraged debt either becoming more costly for those whose credit has taken a hit or only being made available on tighter terms.

Second, and in contrast, lenders will turn their attention to high-quality credits or sectors that have found new avenues for growth during COVID-19, such as technology and healthcare.

Third, loan supply will continue to open up—but primarily for those that meet the right criteria. For those well-positioned companies, this flight to quality will continue to offer favourable terms and pricing, and the light-touch covenant packages that were the norm pre-pandemic should remain in place.

At the same time, an anticipated recovery in mergers and acquisitions and leveraged buyout activity will provide an additional lift in the early months of 2021.

And finally, the issues that were front of mind pre-pandemic will continue to influence borrowing and lending decisions, especially environmental, social and governance (ESG) factors—investors will take a positive view of any credits that incorporate ESG criteria in a meaningful way. This will no doubt drive this trend in the months ahead as recovery takes hold and global debt markets return to growth.

Living dangerously: How has European leveraged finance fared in the pandemic?

  • European leveraged loan issuance is up 11% on the previous year to €227.1 billion
  • High yield bond issuance is up 10% on 2019 figures to €100.5 billion
  • Average yields to maturity on high yield bonds widened from 3.8% to 4.7% in 2020
  • Average margins on institutional leveraged loans increased from 338 bps in Q1 2020 to 401 bps in Q4
stock market

Five trends driving post- COVID-19 documentation

  • Terms will move back in favour of borrowers/issuers (for now)
  • Lenders will hold the line in key areas
  • Forecasting and structuring will be a post-COVID-19 challenge
  • Pricing will continue to bifurcate by sector and rating
  • Competition will encourage private debt and syndicated markets to converge

Buyout rebound reflects optimistic outlook

  • Private equity deal value in Europe totalled €26.5 billion in Q2 2020, the lowest quarterly figure since Q3 2013
  • High yield bond issuance for leveraged buyouts (LBOs) in Europe is up 39% year-on-year to €7.8 billion
  • European leveraged loan LBO issuance declined by 6% to €36.8 billion year-on-year
Financial stock display

Market reset could trigger restructurings in 2021

  • In March 2020, credit insurer Euler Hermes forecast a 43% increase in insolvencies in the UK in 2021, as well as a 26% uptick in France and 12% in Germany
  • By December 2020, ratings agency S&P was forecasting European defaults rising to as much as 8% by the end of 2021
Financial stock display

European CLOs: A mere flesh wound?

  • New issuance of European collateralised loan obligations (CLOs) peaked at just under €4 billion in October 2020 from 12 deals—the highest monthly level since October 2019
  • European CLO new issuance declined 26% year-on-year, with refinancing volumes falling from €6 billion in 2019 to zero in 2020
  • By the end of March 2020, credit ratings on an estimated 10% of loans held by CLO managers were downgraded or put on notice of downgrade—however, the rate of loan downgrades eased and stabilised in the second half of 2020
Financial stock display

Sector split: The very different impact of COVID-19

  • Weighted average bids for healthcare and telecoms credits both priced at approximately 99% of par by the end of 2020
  • Entertainment and leisure and retail loans, meanwhile, priced in the 90% to 93% of par range
  • Between March and September 2020, only the transport and automotive sectors suffered more ratings downgrades and negative outlook changes than the oil & gas industry
Financial stock display

Leveraged finance: The United States versus Europe

  • In the US, leveraged loan issuance for 2020 totalled US$861.7 billion, a 4% year-on-year decline
  • The high yield bond market in the US saw a 69% year-on-year increase to US$428.3 billion
  • The European leveraged loan market increased by 11% to €227.1 billion year-on-year
  • The region's high yield bond market was up 10% to €100.5 billion

European leveraged debt in focus

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

What is shaping sponsor debt decisions for 2021?

  • Leveraged loan issuance for European LBOs dropped 6% year-on-year
  • High yield LBO issuance, however, was up 39% year-on-year to €7.8 billion
  • European direct lending volumes fell from 189 deals in 2019 to 138 deals in 2020
  • Ares Management underwrote the largest unitranche on record with the provision of a £1.875 billion financing package for Ardonagh


After years of warnings about maturity walls, impending cliff edges, downturns
and interest rate hikes that failed to emerge, COVID-19 was the event that brought
everything to a temporary standstill—but there's every chance that the markets will
explode with activity in the months ahead



After years of warnings about maturity walls, impending cliff edges, downturns and interest rate hikes that failed to emerge, COVID-19 was the event that brought everything to a temporary standstill—but there's every chance that the markets will explode with activity in the months ahead

3 min read

European leveraged finance markets kicked off 2021 on a relatively positive note, with investor appetite pushing pricing tighter, robust demand from CLOs, continued inflows into high yield bond funds and the expectation of greater M&A and buyout activity following months of relative stagnation—all of which suggests the markets could see a burst of activity in the months ahead, as economies begin to open up once again.


A remarkable comeback

This optimism follows a challenging year for European leveraged finance markets, as COVID-19 lockdowns were imposed, loosened and then imposed again, and businesses scrambled for liquidity to shore up their finances.

Between February and March 2020, European leveraged loan issuance fell significantly. But by June and July 2020, it had climbed back up to pre-pandemic levels. And while issuance dipped again in the final quarter of the year, leveraged loan issuance overall managed to finish the year up 11% on 2019.

In a year that saw entire sectors effectively shut down around the world, from aviation to hospitality, leveraged loan markets came back to life much faster than many anticipated.

High yield bonds proved even more resilient, despite hitting rock bottom in March with almost zero issuance. By June, as initial lockdown restrictions began to ease in many parts of Europe, the market was back up to €16.2 billion—almost on par with January's figures. By the end of 2020, high yield bond issuance was up 10% on the previous year, as investor appetite for bonds remained robust.

European collateralised loan obligations (CLOs) followed a similar path. In 2020, new-issue CLO volume fell by 26%, with CLO refinancings dropping to zero, but by October 2020, primary CLO new issuance hit its highest monthly level since October 2019. News of vaccines provided another boost across European markets, with reset and refinancing activity expected to return to Europe in force in 2021.

€227 billion
The value of European leveraged loan issuance in 2020


Short-term thinking, long-term goals

This return to relatively healthy activity in leveraged finance markets has been bolstered by a pragmatic approach to documentation and terms. For the most part, lenders reacted to the pandemic as a shortterm, albeit undeniably dramatic, concern. Depending on the sector, businesses that were viewed as trustworthy credits before COVID-19 continued to be viewed as such, and this was reflected in amended processes in 2020, which tended to focus on liquidity and enhanced reporting alongside a reset or suspension of covenants.

For the time being, lenders will mitigate risks by analysing deals even more closely in search of quality credits—which will in turn affect pricing. Any weaknesses or loopholes in documentation will be scrutinised and lenders may be more cautious in their forecasting.

The rise in European high yield issuance in 2020 year-on-year


M&A and buyouts may bloom

Looking to the future, there are plenty of signs that Europe's leveraged finance markets will see robust activity in the months ahead, even as a new wave of COVID-19 lockdown restrictions are introduced.

Lenders still want to lend— encouraged by low interest rates and extensive quantitative easing—and borrowers are eager for financing. More transactions are likely to emerge, for example in M&A, with a clearer view of future earnings and pricing. The range of dealmakers and investment strategies is also likely to expand, from financial sponsors in search of new opportunities to activist investors driving deal activity.

This does not mean deals will be guaranteed, of course: Buyers and lenders will be increasingly selective, along sector-specific lines. They will focus on high-quality assets to minimise risks, as well as distressed companies, buying into sectors hit by lockdowns at low valuations.

Throughout the rest of the year, lenders and borrowers alike can expect to face unprecedented challenges, as COVID-19 restrictions rise and fall and vaccines roll out, but there is every chance that 2021 will also offer up unique opportunities for growth for those who take the plunge.



White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.

This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.

© 2021 White & Case LLP