A brave new world for international leveraged debt
The reshaping of the wider economy has led to increasingly converging and competitive leveraged finance markets
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European high yield and leveraged loan markets have a distinctly different feel from 12 months ago. Volumes and values notably dropped over 2015, leaving issuers and lenders wondering what to expect in 2016 and beyond.
Our report last year, Coming of age: The changing face of international leveraged debt, revealed that the European and international markets were converging in a number of significant ways—across products, markets and investors; across a broader choice of financial instruments; and across legal platforms. We asked the question: how would this trend, and the related development of the European and international financial markets, be impacted by a strong, neutral or a declining market?
Innovation and collaboration are the key themes for 2016—with all market participants working with their advisers to create structures that are suitable for both investors and issuers.
As volumes have retracted from the boom in issuance in 2014, 2015 provides part of the answer, and the start of 2016 sees a more cautious market due to macroeconomic uncertainty, increased interest rates in the United States, market volatility and compliance reform. These factors have led to some interesting developments across platforms:
• in leveraged finance, the emergence of the European Term Loan B as a complementary (or competitive) product to high yield bonds has further narrowed the space between bank and bond deals, as well as US banks and European banks;
• in private equity, while sponsors continue to push for looser deal terms, the markets may be pausing for breath, with some deal terms tightened in the face of a more discerning and assertive investor base;
• in emerging markets, where natural resource price volatility and concerns about capital structures drove a market retraction in 2015, the high yield and Eurobond markets continue to converge (particularly in Africa, as the market matures from sovereign and bank issuances to corporate credits);
• in restructurings, the tension among US Chapter 11, the UK scheme of arrangement and other voluntary restructuring strategies has become more apparent as the new generation of international bank/bond structures continues to come under pressure; and
• credit funds and other one-off investors continue to look for unique opportunities and yield—in some cases, taking advantage of the more reticent public markets to get deals done.
Common across each of the platforms are the key themes for 2016—innovation and collaboration—with all market participants working with their advisers to create structures that are suitable for both investors and issuers. The boom times are not over for European high yield and leveraged loans in the long term, but the pace, flavour and overall feel will be different from the US-style model. It is going to be an interesting ride.
Please follow the links below to read articles in our report, or read the full the report here.
Leveraged debt: The year in review
HEADLINES • European loan and bond markets are down from the highs of 2014 • European high yield bonds value marginally up on 2014 total • Rise of European Term Loan B hints at further market convergence
A reset for debt in 2015?
HEADLINES • Mean European leveraged loan deal size in 2015 was €600 million, compared with €617 million a year earlier • High yield bond issuances and leveraged loan allocations for refinancing have fallen substantially • Europe matures but 2015 is "reality check" for issuers
Eyes on Europe: Cov-lite and Term Loan B rise
HEADLINES • US issuers look to Europe • Cov-lite loans growing in popularity on the continent • US Term Loan B structure has been adopted across the other side of the Atlantic • Investors concerned over erosion of covenant protection
European leveraged debt in focus
Selected European leveraged loan and high yield bond markets by volume
Evolution and alternatives in the market
While fears of another downturn loom, the European financial markets have innovated, evolved and grown.
Innovation is the key to success in 2016
Diverging economic conditions on either side of the Atlantic—as well as geopolitical issues such as global stock market volatility and plummeting oil prices—mean issuers, lenders and their advisers are entering unknown territory.
Opportunities and challenges for international leveraged debt
White & Case partners Lee Cullinane and Rob Mathews discuss how European high yield and leveraged loan markets have changed over the past 12 months and what lies ahead for 2016.
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© 2016 White & Case LLP