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The value of leveraged loan issuance in Western and Southern Europe in 2021
As we enter 2022, there are plenty of reasons to be cautious about leveraged finance in Europe. The economic impact of the latest COVID-19 variant remains an unknown quantity, inflation continues to climb and rising interest rates look increasingly likely—the UK was the first major economy in the region to raise rates and the EU may follow suit.
And yet leveraged finance activity continues to defy expectations. Last year saw the highest annual total value for leveraged loan and high yield bond issuance in Western and Southern Europe on Debtwire Par record. Meanwhile, direct lenders raised record levels in their funds and deployed them in a record-setting year in 2021, including in the private equity (PE) space where direct lending is finding increasing inroads.
As outlined in this report, the drivers for this activity were clear. Refinancing issuance in the first half of the year accounted for approximately half of all leveraged loan and high yield bond issuance. M&A deal value in Western Europe climbed to its highest level since the global financial crisis, establishing a steady stream of financing that has not yet reached its conclusion.
Where does this leave European leveraged finance for the year ahead?
The value of high yield issuance in the region in 2021
Focus on future drivers
There are several pockets of activity worth watching over the coming period.
First, M&A activity—coupled with private equity's ongoing buyout spending spree—has a way to go.
Year-on-year high yield bond issuance supporting M&A (excluding buyouts) climbed by more than 50% in 2021, while buyout-linked issuance more than doubled. There was also an 19% year-on-year jump in non-buyout M&A leveraged loan issuance, with buyout issuance up 81%.
Much of this was down to a spike in megadeals in Europe in 2021, with more than 150 deals worth at least US$2 billion and seven worth at least US$20 billion recorded last year, according to Mergermarket, including the US$31 billion tie-up of Vonovia and Deutsche Wohnen. And where M&A goes, issuance follows.
Second, on the PE side, sponsors spent more than US$300 billion in 2021, almost double the year before and the highest annual value on Mergermarket record—a trend that is likely to continue in 2022. Many PE firms have already raised material new funds or are in the process of doing do, and those will need to be deployed. All of this feeds into debt and equity markets and will keep things moving in the year ahead.
And third, while the latest variant in the pandemic will likely continue to influence decisions for lenders and borrowers alike, environmental, social and corporate governance (ESG) issues will remain on everyone's radar. The onset of ESG financing has created new opportunities for the market and this can be anticipated to grow in 2022.
For many, it's a question of regulations. The EU's Sustainable Finance Disclosure Regulation, which came into effect in March 2021, 'lays down sustainability disclosure obligations for manufacturers of financial products and financial advisers toward end-investors'. More detailed information will be required from lenders in Europe hoping to hook their wagon to the ESG train—any hint of 'greenwashing' will not be tolerated.
At the same time, where available, margin ratchets linked to ESG or sustainability criteria will offer borrowers a potential means to reduce the cost of debt, especially notable if interest rates rise. This also allows lenders to cast their net wider in pursuit of yield, giving them a means to lower risk on credits that they might otherwise not pursue. It's a win-win scenario for both parties that could create a more sustainable finance and investment market.
Lenders and borrowers should prepare for another busy year, but keep in mind that these big waves of activity will not last forever. Ride them for as long as you can, but be ready to batten down the hatches for the next storm.
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