Coming of age: The changing face of international leveraged debt
2014 may well be seen as a landmark for European leveraged loan and high yield bonds – one that could change how investors and borrowers approach leveraged debt markets.
The debt markets are on the move. Last year saw a sharp rise in values and volumes in both leveraged loan and high yield bond markets but, perhaps more importantly, there has been a significant shift in the way these deals are agreed.
What led to this shift? Strong demand in 2014 provided market participants with the opportunity to adapt, to their advantage, the international finance models that developed, sometimes by necessity, during the recent financial crisis. These changes are also evidenced by the ongoing convergence of markets, financial products and investor bases, further aligning global finance. For example, in an era when international corporates seek dollar-denominated borrowings in the United States while US-based sponsors look globally for investor yield, crossover becomes inevitable, in particular as markets continue to recover. These growth trends then further strengthen the relative negotiating positions of, and increase the willingness to innovate by, a growing base of globally aware market participants.
These key trends have big implications for those operating in Europe's leveraged debt markets. European corporates and sponsors now have a broader range of financial products available to them than ever before, and on terms that are less restrictive and more borrower-friendly. High yield's emergence as a competitor to bank finance as a primary source of capital, the growth of alternative capital providers and new structures for the legacy loan market all contribute to increasing choice for borrowers.
Additionally, the convergence of terms between both sides of the Atlantic Ocean means that sponsors and corporates are able to negotiate US-style terms for European-based loan transactions and looser terms in bond covenants. This is leading to new precedents being set. Incurrence-based covenants are becoming increasingly common in Europe as corporates—in particular those with quarterly covenant tests in their loan documents dependent on financial performance—now desire and, more crucially, can access less onerous restrictions both in the high yield market and the emerging covenant-lite loan market. And elsewhere, while Europe has seen significant developments in the leveraged finance arena, it's hard to ignore the rise of high yield bonds elsewhere in the world, as leveraged debt markets gain traction and become more sophisticated.
The overall picture is of an increasingly international leveraged finance market. Investors are seeking yield and diversity both by industry and geography, while borrowers are increasingly looking for a broader range of funding sources and improved terms. Now, it seems, parties on both sides of the equation are beginning to find them.
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A new dawn: Record year for debt heralds new era
• European loan and bond markets see activity surge in mid-2014 • Attractive pricing and extreme liquidity fuel borrowers' market • Greater M&A and private equity driving leveraged debt • Covenant-lite loans arrive to complement high yield growth
On good terms: Convergence drives issuer-friendly markets
• Loan covenants loosen towards high yield bond standards • Convergence of US and European loan market terms • Convergence leads to less onerous terms for borrowers • Portability becomes increasingly prevalent in European high yield bonds • Emergence of alternative capital providers adds to choice
State of play: Global debt markets positioned for growth
• Western European loans and bonds bounce back in 2014 • Frontier markets see increasing leveraged debt demand • Southern Europe rebounds after rough few years • Private equity a key driver of European activity
European leveraged debt in focus
• Selected European leveraged loan and high yield bond markets by volume
Leveraged debt markets in 2015: The convergence era
White & Case partners Lee Cullinane and Rob Mathews discuss why 2015 will be an exciting year for financial markets in Europe:
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