European leveraged finance: From survive to thrive

European leveraged finance markets rebounded in the past 12 months, driven  by enthusiastic refinancing activity and a resurgent M&A marketplace, setting the  stage for a healthy year ahead

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Foreword

European leveraged finance markets look remarkably healthy as we enter 2022. This may come as a surprise, after 12 months of economic volatility underpinned by everything from a new COVID-19 variant to growing inflationary pressures. What does this mean for the months ahead?

The start of the new year is full of positives in the European leveraged finance market. There has been a clear shift from survival to growth strategies among lenders and borrowers, setting the stage for significant activity in almost all sectors.

The numbers paint a clear picture. European leveraged loan issuance climbed more than 25% in 2021, year-on-year. High yield bond markets in the region were even more enthusiastic, with issuance for the year up 47% on 2020's total.

Ongoing government support in the EU and the UK helped companies that might otherwise have fallen victim to the pandemic stay afloat. Low interest rates and pricing sparked a wave of refinancing. CLO activity—most of which was intended for refinancing and resets—pushed new CLO issuance up by 75% year-on-year. 

A bottleneck of demand as well as significant private equity dry powder also brought a flood of new deal money into the market. Companies that were once hesitant to sell encountered enthusiastic buyers aggressively looking for targets. Buyers, meanwhile, found themselves in a better position to judge whether a potential target was likely to struggle or grow in 2022 and beyond. Lenders reaped the benefits, with high deal volume in which to participate. At the same time, unlike many other industries, European direct lending funds avoided any significant downturn in deployment and deal activity due to COVID-19. According to data from Debtwire Par, direct lending issuance in the region reached €36.2 billion in 2021, surpassing 2020's full-year total of €21.4 billion. This provided a liquid and competitive market for finance products.

Possibilities and pitfalls

Set against this positive backdrop, does the future look entirely bright for leveraged finance? Not necessarily—some challenges remain, and each may have an impact on European issuance. 

For example, climbing COVID-19 case numbers driven by the Omicron variant may convince some corporates to hold on to their reserves. Any resulting new lockdowns or restrictions could also be the final straw for businesses that have already struggled during the pandemic.

Inflation and attendant interest rate rises are also likely to influence potential borrowing decisions in the coming months. The UK got the ball rolling with its first interest rate rise in three years in December 2021, and the EU may follow suit in 2022—despite claims to the contrary by the European Central Bank. 

Any rise in the cost of debt will affect M&A and buyout activity, as well as financing. Some may pause while others—from corporates in good financial shape to PE firms with money to spend—may decide to invest in a post-COVID-19 future. Either way, M&A and buyout deals in the pipeline already suggest that issuance will remain healthy in the first half of the year at least.

And, finally, environmental, social and corporate governance criteria will be on the menu for every European business. New benchmarks due in 2022—from the EU's Sustainable Finance Disclosure Regulation to the European Leveraged Finance Association's updated Sustainability Linked Loan Principles—are already making lenders and borrowers sit up and take notice. 

All this activity means the stage is set for companies hoping to thrive rather than simply survive. Lenders chasing higher-yield opportunities will be on the hunt for new investments, and borrowers can be expected to provide lenders with a healthy volume of demand for debt financing in 2022.

Hitachi Energy
Hitachi Energy

From survive to thrive: European leveraged finance looks to the future

  • European leveraged loan issuance was up by more than a quarter, year-on-year, to €289.7 billion in 2021
  • High yield issuance reached €148 billion in 2021, up 47% on 2020 (year-on-year)
  • Refinancing accounted for approximately half of overall leveraged loan and high yield bond issuance for the year
  • Both M&A and buyout activity saw double-digit year-on-year rises in deal-related issuance
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Sunrise in the Quartier de la Défense
Sunrise in the Quartier de la Défense

Five factors driving leveraged finance in 2022

  • Supply chain risks are going to be of increasing concern for lenders 
  • Inflation and interest rate rises may influence deals, even if they do not shift the market
  • Private equity (PE) is still on a spending spree that will influence debt market decisions
  • Lenders searching for yield will finance riskier credits on the right terms
  • Terms and documentation will continue to be influenced by credit quality, sector and rating
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Aerial view of the skyline of Frankfurt at sunrise
Aerial view of the skyline of Frankfurt at sunrise

M&A financing keeps the leveraged finance market beating

  • European leveraged loan issuance for M&A (excl. buyouts) climbed 19% year-on-year, reaching €54.9 billion in 2021 
  • High yield bond issuance for deals jumped to €17.8 billion in 2021, a 53% gain on 2020 
  • European M&A deal value came in at US$1.3 trillion in 2021—just shy of the record set in 2007 (US$1.4 billion)
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Sun rising over Tower Bridge
Sun rising over Tower Bridge

Buyout momentum paints a strong picture for issuance in 2022

  • Buyout deal value in Western Europe hit an all-time record high by the end of 2021, more than doubling year-on-year 
  • Private equity (PE) activity supported an 81% uplift in buyout loan issuance year-on-year, climbing to €66.7 billion in 2021 
  • High yield bond issuance intended for buyouts reached US$15.4 billion in 2021—more than double 2020's total
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high-rise buildings
high-rise buildings

European CLOs and the unstoppable impact of ESG

  • New European collateralised loan obligation (CLO) issuance in Europe is up 75% year-on-year, reaching €38.5 billion in 2021
  • CLO issuance intended for refinancing and resets came in at a record €57.5 billion for the year
  • By July 2021, 34% of the EU's total assets under management was compliant with the region's new Sustainable Finance Disclosure Regulation (SFDR), and this is expected to climb to more than 50% in 2022
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The skyline of Frankfurt is reflected on the river main at sunrise
The skyline of Frankfurt is reflected on the river main at sunrise

US versus Europe: Will their shared path continue in 2022?

  • In the US, leveraged loan issuance for 2021 reached US$1.4 trillion, a 63% increase year-on-year
  • The high yield bond market in the US was relatively flat, rising from US$428.3 billion in 2020 to US$429.7 billion in 2021
  • In comparison, in 2021, the leveraged loan market in Western and Southern Europe increased by 28% year-on-year to €289.7 billion
  • The region's high yield bond market during that period was up 47% year-on-year to €148 billion
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European leveraged debt in focus

Selected European leveraged loan and high yield bond markets by volume and value

sunset over the arch bridge
sunset over the arch bridge

Conclusion

A flurry of activity saw year-on-year leveraged finance issuance in Europe hit new heights in 2021. Can this pace be maintained in the months ahead? Based on pipeline activity and investor appetite for growth, the answer seems to be: Yes.

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