Our thinking

European leveraged debt lifts off

What's inside

Loans and high yield bonds make a comeback as economic vitality breeds confidence among investors and issuers

Leveraged debt is alive and kicking

It has been a banner year for the leveraged debt markets, and despite a number of political and economic headwinds, 2018 could be even stronger.

As we enter a new year, we are happy to report that the leveraged finance market is flourishing in Europe and the rest of the world. This welcome news comes after a disappointing 2016 and an uncertain start to 2017.

And it is even more welcome against a backdrop of geopolitical uncertainty across the world. Fortunately, the global economy has been more benign, with the US and EU showing growth and many emerging economies strengthening.

As we predicted in the previous issue of our report, the ongoing competition for market position between the covenant-lite term loan B and high yield bonds continues. The term loan B had a strong start to the year, although high yield caught up later in 2017 with a surprising surge. High yield had a momentary pause in the third quarter, as market participants caught their breath from the robust round of activity, but the fourth quarter saw a renewed uplift.

Convergence, which has been a long -running theme in all of our annual reports, continues unabated. In 2017, the meeting of the minds between the US and Europe has taken the form of both regions seemingly trying to outdo each other in the covenant flexibility or covenant erosion realm, depending on your point of view.

And what of the year ahead? There is every reason to believe that the trends seen in 2017 will continue—at least, in the short term. However, there could well be headwinds, as geopolitical uncertainties exert their influence. MIFID II, new ECB regulations, Brexit and interest rate increases could weigh heavily on EMEA markets in 2018. However, attention will be on the developments in the US where there is talk of deregulation under the Trump Administration, which runs counter to the continuing tightening regulatory environment in Europe.

On a positive note, buy-side demand remains strong with sell-side assets available. As a result, we can expect a combination of refinancings; private equity and acquisition-based lending; and opportunistic (including dividend) new money deals. There should also be interesting prospects in a more settled high yield market, a bridge-to-bond and term loan B product mix as well as the more traditional European bank financing structures. Other financial products, such as asset-backed securitisations, are expected to add to this diversity of options, and an optimist may even argue that adapting to new regulation will create new opportunities.


Rob Mathews
Partner, London

Lee Cullinane
Partner, London


Leveraged debt storms back in 2017

  • Leveraged loan value outstripped 2016 level by €131.3 billion in 2017
  • Value of high yield bonds has surpassed 2016 by 32 percent
  • Refinancing and repricing drive the market
  • Leveraged loans continue primacy over high yield bonds
Frankfurt city downtown

Issuers in the driving seat

  • Average size of leveraged loan increases significantly
  • Weighted margin of first-lien loan drops to lowest level in years
  • Term loan B issuance outstripped 2016 levels within the first three quarters of 2017
  • Cov-lite deals march on
Old building at Zurich Switzerland

European leveraged debt in focus

Selected European leveraged loan and high yield bond markets by volume

Click here to download PDF

The future for European leveraged debt

Economies are strengthening and the outlook is probably the best it has been in 10 years, but there can be no room for complacency in the debt market

Place Vendome, Paris

European leveraged debt lifts off

White & Case partners Rob Mathews and Lee Cullinane explain how 2017 was a banner year for loans and high yield bonds in Europe and discuss the strong prospects for European leveraged debt markets in 2018.

Issuers in the driving seat

• Average size of leveraged loan increases significantly • Weighted margin of first-lien loan drops to lowest level in years • Term loan B issuance outstripped 2016 levels within the first three quarters of 2017 • Cov-lite deals march on

6 min read


The rise on the value of term loan B issuance compared to 2016

As the asset class has grown in popularity, the average leveraged loan size in Europe has leapt up. In 2017, it grew to €782 million—up from €705 million in 2016 and €586 million in 2015.

On the refinancing front, one of the more notable deals was the aforementioned WindTre deal. As for M&A-inspired transactions that grabbed the headlines, one standout was UK Micro Focus International's €7.86 billion issuance that backed its acquisition of Hewlett Packard Enterprise's software business.


The continued popularity of cov-lite deals reflects the shifting balance of power between borrowers and lenders in an era of looser monetary policy and lower interest rates.

Issuers vs investors

To date, the flex activity—when pricing on a leveraged loan is cut or increased during the syndication process, depending on investor demand—demonstrates that this is very much an issuers' and sponsors' market. In 2017, downward flexes have outpaced investor-friendly upward flexes by a ratio of nearly 5:1 and in the fourth quarter by 7:1. Moreover, borrowers seem to have the technical upper hand due to the absence of original issue discounts and benchmark floors that have moved lower.

Against this competitive backdrop, it is no surprise that spreads and yields have tightened across the asset classes. The average weighted margin for first-lien institutional loans stooped to their lowest levels in several years at 346 bps versus 414 bps in 2016. The same descent occurred in yield-to-maturity, which came in at 4.3 percent in 2017. The spreads widened in the third quarter, with prices firming to 370 bps up from 355 bps in the second quarter, before tightening to 322 bps in the fourth quarter.

As in the underlying loan market, CLO spreads have come under pressure across the stack in each quarter this year. CLO AAA spreads tightened to an average of 77 bps in the fourth quarter of 2017, ranging from 72 bps to 85 bps on individual deals. Spreads on the other liability tranches have followed a similar trend, reaching their lowest level of the year in the fourth quarter, with AA tranches averaging 123 bps most recently and BB tranches at 510 bps.



Risk and refinancing revival

The search for yield has also meant a shift towards riskier credits, with 62 percent of leveraged loans which are rated B+ and below compared to 53 percent last year. It is a similar development on the bond side, with 43 percent of rated credits at B+ or lower, up from 30 percent a year ago.

Term loan B (TLB) has also gained a wide following, with issuance of €92.6 billion in 2017 exceeding the €55.1 billion worth of deals done in 2016. TLB cov-lite have been a particular favourite, with €74.1 billion coming onto the market, a substantial hike from the €29.4 billion seen last year.

Although refinancing has been the most popular theme, M&A volume has also been supportive, with healthy deal flows that have already exceeded last year's level— jumbo loans have been a major feature of 2017. This is reflected in Debtwire's figures, which show that leveraged loans emanating from M&A activity (excluding LBOs) were worth €35.7 billion in 2017 compared to the €16.8 billion in 2016. Meanwhile, high yield bond issuance for M&A (excluding LBOs) was €7.8 billion, up from €4.7 billion last year.

Research from Debtwire also found that the average total adjusted leverage ratio for the deals it analysed was 5.3x, while M&A transactions came in at 5.8x. On a net adjusted level, leverage averaged 4.9x overall and 5.6x for M&A deals. This is in line with the ECB guidance, issued earlier in the year, which stated that leverage ratios should not exceed six times.




Lite for life

Although they barely existed in the pre-financial crisis days, cov-lite loans have become a firm fixture of the European leveraged loan landscape

The growth and popularity of cov-lite deals reflects the shifting balance of power between borrowers and lenders in an era of looser monetary policy, lower interest rates and an increasing institutional investor base. In other words, yield-seeking investors are willing to embrace more risk against limited deal flow. In 2017, the share of first-lien institutional loan issuance that was cov-lite topped 76 percent, up from a 27 percent share in the first half of 2016 and 52 percent in H2 2016.

While a European cov-lite loan sees the removal of maintenance covenants, it also typically has a so-called springing leveraged covenant in the revolving credit facility. Historically, these were tested when between25 percent and 30 percent of the revolving credit facility was drawn. However, usage triggers have moved higher in 2017, with 47 percent of credits having a trigger greater than 35 percent compared to 18 percent of loans last year.

The use of portability, which was a regular hallmark of the high yield bond market, has also become more common in the loan market. It has risen from only 3 percent of loans in the second half of 2016 to 13 percent in the first half of 2017, although this slipped back to 8 percent in the second half of the year.

This year has also seen a loosening of restrictions on acquisitions, with covenants not subjecting acquisitions to any monetary cap or any form of leverage ratio tests. The percentage of loans having no such restrictions climbed to 74 percent in the second half of 2017 versus 71 percent in the first half of the year.

View full image


From high yield bond to IPO

A high yield bond issuance could act as a stepping stone when a company issues public equity

An initial public offering (IPO) may be a natural step after a high yield bond issuance but, as with any public flotations, market conditions have to be right. For example, Play Communications, the owner of Poland's current largest mobile network operator, Play, raised approximately €1.03 billion when the company floated in the summer and the Gamenet Group, an Italian gaming operator, completed its public listing in the fourth quarter.

The IPO process can leverage key sections of a high yield bond offering memorandum such as risk factors, business, management's discussion and analysis and industry, which provide a good foundation for equity offering documents. The information is easily transferrable and in a readily usable form for the listing process. Moreover, given the ongoing reporting obligations in the high yield bond covenant package, a substantial amount of the business and financial disclosure can be easily updated with pre-existing materials. This is even the case if some time has passed since the issuer's high yield bond offering.


Sector watch

During 2017, services (€32.6 billion), chemicals and materials (€23.5 billion) and financial services (€18.6 billion) were the top three sectors comprising over 25 percent of leveraged loan issuance. Automotive at €16.2 billion and medical at €15.6 billion were next in line. While refinancings were a key factor, others also tapped the markets for new money.

On the high yield side, financial services were out in front with €19.33 billion and a 17 percent share of the total bond issuance value. Debt service providers such as Cabot Credit Management, the UK's largest debt collector, and Amigo Loans have been most active as they looked to refinance both debt and new capital.

View full image




This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2018 White & Case LLP