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

Financial stock display

Sector split: The very different impact of COVID-19

5 min read

World in Transition

Our views on changing dynamics in energy, ESG, finance, globalization and US policy.


  • 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

Leveraged finance lenders have taken an increasingly selective approach in the wake of COVID-19, but quality credits in the right sectors will continue to receive favourable terms and pricing.

While the pandemic had a global impact on business, some sectors were hit harder than others. Lockdowns and travel restrictions had an immediate effect on the entertainment and leisure, hospitality, retail, oil & gas and aviation industries. Businesses in sectors like technology, services and healthcare, by contrast, continued to trade strongly through the course of 2020 and have been favoured by lenders.

Secondary pricing has reflected this sector bifurcation. Weighted average bids for healthcare and telecommunications credits, for example, both priced at approximately 99% of par by the end of 2020. Entertainment and leisure and retail loans, however, priced in the 90% to 93% of par range—though pricing in both sectors climbed from lows in the 85% range around September. These sectors, and others particularly affected by COVID-19, managed to outperform through the end of the year, though pricing continued to be affected.

The decline in global air traffic in 2020 due to the pandemic, according to the International Air Transport Association


Assessing sector filters

Under COVID-19, many lenders assessed sector exposure by broadly grouping credits into three categories: Those that were under financial pressure prior to lockdowns and whose decline accelerated as the pandemic spread; those that were solid credits pre-pandemic, but were hit severely by lockdowns; and those that performed well before and during the pandemic.

Physical retail fell into the first category, with euro area retail sales down despite strong performance from supermarkets and online retailers. The shutdown of 'non-essential' retail stores through lockdowns was too much for many businesses that were already struggling.

Liquidity lines have now run dry for many of these companies, particularly in the UK. Retail conglomerate Arcadia, for example, went into administration in November after unsuccessful attempts to secure a £30 million rescue loan from potential lenders. Department chain Debenhams succumbed to liquidation following two administrations.

The global oil & gas industry is another sector that was already feeling the pressure before encountering deep disruption under COVID-19, when lockdowns suppressed demand and hit oil prices even further. Between March and September 2020, only the transport and automotive sectors suffered more ratings downgrades and negative outlook changes than the oil & gas industry.

Bond markets remained open for European oil majors, including BP, Shell, Total and ENI, but smaller independents turned to alternative sources of funding. Reserve-based lending (RBL) facilities, which provide capital secured against a borrower's undeveloped reserves, offered oil & gas companies an additional line of finance. The size of these facilities, however, is reviewed biannually and determined by the price of oil. Oil & gas companies, therefore, have to keep a close eye on balance sheets to ensure that falling oil prices do not leave them at risk of default. FTSE 350 independent Tullow Oil, for example, reduced its RBL facility through the course of the year as oil prices shifted.

Oil & gas companies also had access to revolving credit facilities and support through COVID-19- linked loans from governments and central banks.


Long-term view

The situation facing companies in the second category, which includes aviation and leisure businesses, has been somewhat different. Despite being severely impacted by lockdowns, these credits were fundamentally sound and are expected to recover as COVID-19 restrictions are eased in 2021.

Lenders have been willing to take a longer-term view on such businesses. The global aviation sector, for example, suffered a 66% decline in 2020 air traffic, according to the International Air Transport Association. The sharp fall in bookings resulted in a swathe of European airlines having their credit ratings downgraded to high yield during 2020, including national carriers British Airways.

Airlines nevertheless continued to access liquidity via bond markets and government-backed loan schemes. Raising finance for companies in this category, however, has been more expensive. Finnish airline Finnair, for example, raised a €200 million bond with a 10.25% coupon.

Carnival—the cruise line operator that was an investment-grade credit pre-pandemic before a downgrade to high yield in the summer—provides a further example of this theme. Early in the pandemic, the company priced a US$4 billion high yield bond at 11.5%. A year earlier, it had raised €600 million at a price of 1%, illustrating how swiftly lending markets have shifted in certain sectors. The cruise operator's bond, raised in April 2020, also had to be secured against the company's fleet as collateral.


High-quality credits in demand

Prices have also edged higher for the more resilient borrowers who fall into the third category, but not nearly as much as for credits in harder hit sectors like travel and retail.

Companies in technology and healthcare have been the major beneficiaries, but other credits with strong fundamentals, such as industrials and services, have also been favoured. Loan and high yield markets remain open and eager to support high-quality credits in these select industries.

The €17.2 billion carve-out of ThyssenKrupp's elevators business led by buyout firms Advent and Cinven, along with Germany's RAG Foundation, for example, secured a €10.3 billion package of loan and debt financing in the summer after receiving orders of more than €20 billion from investors.

Despite nervousness from arranging banks about investor uptake following lockdowns, the oversubscribed offer was completed ahead of deadline. Arrangers were able to maintain pricing levels on loans without being flexed, and tighten pricing across all bond tranches. The credit did have to make some concessions on terms, but overall still secured a borrower-friendly document. 

Credit quality and sector resilience are expected to continue colouring lender appetite going into 2021. Lenders will remain selective around the credits they back and willing to provide flexible pricing and terms for the right borrowers. The increasing attention paid to environmental, social and governance factors by CLOs will also see the market favour credits that can address this vital subject. Ongoing money printing and strong anticipated liquidity will build momentum behind these trends.



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