European leveraged finance: A bifurcated balancing act

Sector watch: Hot or not?


  • Industrials and chemicals in aggregate accounted for the largest share of loan activity (20 per cent) and high yield bonds (22 per cent) in Europe
  • Pharma, medical and biotech issuers were the second most active in European leveraged loans, (14 per cent of deals in aggregate)
  • Services topped the list for loans in Europe with 11.2 per cent of issuances for the region

As Europe's leveraged finance market has matured and filled the space vacated by banks following the financial crisis, investors have broken free of sector silos and embraced a much broader spread of industries.

Pre-crisis, the European high yield market was focused primarily on telecoms and other fast-growing industries. It has since become far more diverse. This was already evident in the US, where the market had broadened beyond the traditional group of high-growth issuers.

Issuance figures for European high yield and leveraged loans in 2019 show that no individual sector accounted for more than 23 per cent of the market, and that none of the 10 most active sectors accounted for less than 4 per cent. Leveraged finance has become a broad church when it comes to diversification by industry.

The proportion of leveraged loan activity in Europe issued in the industrials and chemicals sector, in aggregate


Diverging paths for leveraged

loans and high yield bonds In broad terms, industrials and chemicals in Europe have been most active for issuance in both the leveraged loan and high yield bond spaces. According to Debtwire Par data, industrials and chemicals combined accounted for the largest share of activity in loans (20 per cent) and high yield bonds (22 per cent).

This, however, is where the similarities end, with issuance diverging by sector between leveraged loans and high yield bonds.

In leveraged loans, pharma, medical and biotech issuers were the second most active, accounting for 14 per cent of deals, but only 3 per cent of high yield issuance. There is a similar imbalance in the financial services sector, which made up only 5 per cent of European leveraged loan issuance in 2019, but 16 per cent of high yield bond activity.

The types of borrowers active in these sectors have coloured issuance numbers. Private equity firms, for example, are active in the services space and have recently demonstrated a preference for loans, as illustrated by 2019 figures showing buyouts as the secondlargest source of loan issuance at €39.2 billion (behind refinancings/ repricing at €87.7 billion).

In high yield bonds, however, services is only the third-largest sector by issuance (5.1 per cent), and LBO takings of €5.6 billion are less than 15 per cent of the €51.1 billion raised for refinancing.

The predominance of chemicals/ industrials as well as financial services for 2019 issuances may reflect the softer high yield market earlier in 2019, with issuers that are more 'sure bets' coming to market and those that are either new to the space or in possession of other financing options taking a different route.


A focus on credit quality and sector-specific terms

Both leveraged loan and high yield bond investors in general have made an obvious shift to focus on credit quality. Sectors that are under particular pressure, such as automotive and consumer retail, accounted for only 4.4 per cent and 6.8 per cent of deal activity, respectively, in the European loan space in 2019. In the high yield bond market, consumer retail made a small appearance with 2.8 per cent, while automotive only represented a 6.9 per cent share of deals.

The focus is now very much on the business model. Lenders are taking a closer look at the fundamentals of a business and its sector than they did just a year or two ago.

Sector is also influential when it comes to terms. Historically, the market has been sympathetic to the relaxation of certain terms for companies in specific industries. For example, chemical companies as well as oil & gas operators have been given wide flexibility to invest in joint ventures without further controls, given that this is how the companies have tended to operate their businesses.

The market has also been sensitive to credit-specific points applicable to certain sectors (for example, issuers in the debt purchase and servicing space typically have had tighter controls on securitisations, although that has loosened for certain names in their subsequent issuances).

However, companies returning to the leveraged finance market from sectors where there have been quirks in covenant packages in the past may find that investors are looking very closely at terms and asking whether they still make sense, or whether they could create too much flexibility for the issuer in a downturn.

It is almost certain that operators in distressed sectors (such as retail) will need to tighten covenant packages if they are coming back to market, although businesses in more resilient areas, such as software-as-a-service, will have an easier process.

Some sector borrowers, especially those under pressure and seeking favourable terms, may discover that they must do their homework if they want to attract willing lenders in the months ahead.


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European leveraged finance: A bifurcated balancing act


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