European leveraged loan and high yield bond markets experienced a landmark year in 2014, according to a new report by White & Case, Debtwire Analytics and Xtract Research.
Coming of age: The changing face of international leveraged debt, reveals that leveraged loan allocations and high yield bond issuance were at record highs, with total values reaching EUR97 billion and EUR116 billion respectively for the whole year.
Furthermore, the convergence between US and European loan and high yield bond terms became one of the biggest stories in the debt markets in 2014. A significant shift towards more flexible, borrower-friendly terms was seen in 2014, more closely resembling those of US markets. In particular, there has been a marked increase of covenant-lite loans in Europe over the past year, with 16% of first lien loans in 2014 arranged without maintenance covenants compared with none in 2013.
“2014 was extremely busy in terms of the sheer volume of debt issuance. However, this was not just ‘more-of the-same’ – it was also a very dynamic year in the evolution of covenants, particularly with the arrival in Europe of US-style covenant lite loans. In addition, there was some notable cross-fertilisation between the high yield bond and leverage loans markets, making the two asset classes more similar – to the advantage of borrowers,” says Xtract Research’s European Managing Director, James Slessenger.
Across Western Europe, leveraged loan and high yield bond values and volumes were up in nearly all markets in 2014. Greater confidence around European recovery prospects and an increasingly liquid market, which led borrowers and issuers seeking to capitalise on the favourable terms available from lenders and investors, has encouraged this, with the affects most apparent in Northern Europe, with the UK & Ireland, France, the Nordics and Benelux countries.
“European leveraged finance markets were highly active in 2014, particularly in the first half. Issuers were able to take advantage of investor's hunt for yield to obtain financing on terms friendly to them to refinance their existing debt, pay dividends to sponsors or acquire other businesses,” says Nicholas Smith-Saville, Senior Analyst at Debtwire Analytics. “While risk aversion returned in the final part of the year, deals continued to be struck for higher quality names. Looking forward, the degree to which the convergence trends highlighted in this report are likely to continue will depend on credit performance. However, as investors familiar with high yield style financing increase their presence in the market, a shift in the 'market standard' is possible,” Smith-Saville concludes.