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Taking stock: de-risking remains key focus for loan issuers and investors alike

August is a good month to reflect on issuance over the course of the past year, ahead of the September push through to the holiday season and the advent of the new year. While syndicated leveraged loan and high-yield (HY) bond markets have endured a challenging time during the past eight months, sentiment is far from rock-bottom thanks to softening expectations of a US recession, leveraged yields stabilising, and defaults merely trickling upward. There may yet be further bumps in the road; however, the market appears ready to spring back into action as and when the shackles are loosened.

The subdued performance in the loan market has been supported by amend-and-extend (A&E) activity, as issuers look to shore up balance sheets ahead of the most telegraphed downturn in recent history. Refinancing has taken center stage in 2023, propping up issuance at over 80% of the total. Not pulling its weight this year is new-money institutional activity, which has seen an eye-watering 70% year-on-year (YoY) collapse on the back of a continuing lack of supply from M&A auction processes.

The ongoing reliance on refinancing activity via A&E transactions suggests issuers are in a holding pattern, continuing to push out debt that is due to mature in the near term, while future macroeconomic predictions remain unreliable.

Within the debt that has been raised, 2023 has seen a shift towards higher-rated firms, with 39% of leveraged loans rated BB or above this year, up from 32% in 2022 and 30% in 2021, indicating a market actively pursuing the safety of higher-rated credits. This adjustment, while notable, falls within historical patterns and represents a calculated adaptation rather than a drastic departure from established norms.

In line with this move, total and net leverage on new issuance has continued to decline, as average EBITDA rises in the aftermath of the pandemic and debts are simply rolled over, with new-money issues few and far between. Gross leverage in July fell to 3.9x, well down from 5.5x at end-2020.

Also in July, defaults hit 3% for leveraged loans, according to Fitch Ratings, having increased steadily from 0.4% in February 2022. Healthcare and pharmaceutical firms continue to lead the wave of defaults, with almost USD 14bn worth of loans within the past 12 months.

In the bond market, issuers are also preparing for harsher times ahead, electing to use secured structures over unsecured facilities. Secured notes had risen to 50% of senior issuance last quarter from 25% in 1Q21, providing further evidence of issuers’ emphasis on risk mitigation.

One positive takeaway is the relative stability of yields in both the loan and bond markets in recent months, rising 0.8% and 0.5%, respectively, over the course of the year. With hatches seemingly fully battened down, this stability could represent a calm before a storm or a continued softening of the once-likely cataclysm.

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Risk-return decoupled: direct lending leverage ratios rise, but competition keeps margins stable

In a challenging macroeconomic environment, where rising interest rates stress debt on balance sheets, the leverage ratios of direct lending deals in Europe have continued to rise over the past 10 quarters, as Debtwire’s direct lending database shows.

The average ratio in Europe climbed to 4.6x in 2Q23 from 3.5x in 1Q21, a trend seen across all major regions. France recorded the smallest increase, as the leverage ratio inched up to 4.4x from 4.2x, whereas the UK’s average has rocketed to 5.4x from 2.9x.

Looking at the leading sectors in the market, leverage has been more volatile, but each shows a consistent upward trend, with all the main sectors demonstrating higher levels than in 2021. Leverage for deals in the services sector has escalated to 4.6x from 3x, while for firms in the TMT industry it jumped to 5x from 3x. Healthcare deal leverage hit 5.1x in 2Q23.

Margin resilience

By contrast, average direct lending margins have remained relatively stable since 2021. This stability is surprising given the leverage increase and higher-risk macro environment.

The average margin on direct lending deals has moved to 791 basis points (bps) from around 800 bps in 1Q21, peaking at 807bps in 1Q23 following a trough of 718bps in 2Q22.

Data also shows that stability is evenly spread among the main sectors, with healthcare, services and TMT deals pricing on average between 600bps and 800bps since the start of 2021. The exception is financial services, which has seen outlier deals boost the average figure in three of the previous six quarters, but with little impact on the general trend.














The data for specific regions has been more volatile. In the UK, one of the leading jurisdictions in direct lending, margins have only recently peaked in 2Q23 at 930bps. However, widening has been compensated by developments in other regions such as France and the DACH countries, where spreads have contracted since last year.

These numbers contrast with the large-cap loans space, which is also heavily linked to the Euribor inter-bank lending rate, but where margins have increased to 457bps from 398bps over the same period.

All this is happening in an environment in which direct lenders have been pushing into and challenging players in the syndicated loan space, showing an appetite to close deals with high leverage ratios.

On the other hand, while challenging syndicated loan players, direct lenders also face increasing competition in their own field.

Direct lending fundraising has seen exceptionally large executions over the past quarter, with Bridgepoint’s EUR 3.4bn fund closing last month and Permira’s EUR 4.2bn fund closing in mid-June. These add to the huge funds raised last year including a EUR 7bn offering from Barings, EUR 6.3bn from CVC and EUR 5bn from Ardian, among a plethora of others.

With more money to be invested in direct lending, borrowers are better positioned to fight for cheaper money, and therefore lower margins. This helps to explain the margin stability even when lenders face deal opportunities at levels of higher leverage.

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DebtDynamics EMEA | Last frontier: Common currency conquers non-Eurozone countries to dominate lev loan market

Since its creation, the euro has been the most relevant currency in the European leveraged loan market. The most obvious choice for companies based in countries such as Germany and France has had a substantial comparative advantage, which can easily explain its preponderance.

Nevertheless, euro-denominated syndicated loans have expanded their dominance in recent years, leaving little to no room for other currencies in the European leveraged market.

According to Debtwire data, the share of the European leveraged loan syndication market denominated in the EU common currency jumped from 80% in 2015 to levels closer to 95% since 2019.

Source: Debtwire

The growth in the EU’s official currency dominance happened in parallel with the expansion of the European CLO market, which is predominantly based on euro-denominated loans. It has meant that European issuers seeking to issue loans in currencies other than the euro face limited demand and risk alienating an essential group of investors.

On the other hand, the CLO managers have created significant demand and an incentive to issue in euros. The amount analysis shows that the volume issued in non-euro currencies has fluctuated from EUR 4.5bn-equivalent and EUR 15.6bn-equivalent between 2014 and 2021, indicating a smaller but continuous market for this paper. The non-euro issuance share was squeezed by the impressive growth the euro-denominated market experienced during the timespan. Then, in the past year and a half, when the interest rates rose, issuance fell across different currencies.

Source: Debtwire / Creditflux 

Little room for local currencies

An analysis of the two main non-eurozone regions in Western Europe, the Nordic countries and the UK, shows clearly where and when the euro-denominated paper has gained decisive room.

In the pre-Brexit period, sterling-denominated loans comprised around 70% of the UK-based syndicated loan market. But the share has continuously decreased since 2015, plummeting to less than 10% in 2022.

Source: Debtwire

In the Nordic countries, the decrease in local currency denominated loans issued in Norwegian, Swedish, and Danish is less linear but still palpable. Issuers from Norway, Sweden and Denmark used to print 50% to 60% of their deals in their local currencies up to 2016, a figure that has dropped significantly during the pandemic.

In 2022, companies such as SSIBoConcept and Carousel Logistics issued a combined EUR 300m-equivalent loans denominated in DKK, causing a jump in the local currency share to 26% of the total market. However, it appears to have been a temporary outlier, as thus far, in 2023, no Nordic institutional loans denominated in krone have come to the syndicated European market.

Source: Debtwire

Leveraged loan investors favour euro-denominated instruments in the current environment due to a decrease in both currency and liquidity risk caused by a deeper investor base. This move has cemented the gradual domination of the euro, which was spurred on over the years by the maturation of the CLO market and the weakening of the sterling investor base.

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APAC (ex-Japan) mandates mushroom as protracted workouts yield new advisory opportunities – Advisory Mandate Report 2Q23/1H23

The number of debt-restructuring-advisor appointments in APAC (ex-Japan) mushroomed in 2Q23 compared to the previous quarter, though this sharp increase wasn’t due to a spike in new distressed situations, but rather to additional appointments being made on restructuring processes that had begun before the quarter.

A total of 72 mandates were awarded in APAC (ex-Japan) in 2Q23 compared with 40 in 1Q23 and 70 in 2Q22. Of the 72 mandates, 51 came from situations in which a debtor had defaulted for the first time or where advisors were appointed prior to this year. The advisory roles awarded in 2Q23 were for situations that involved a total USD 50.1bn debt, up significantly from USD 18.1bn in 1Q23 but down slightly from USD 59.8bn in 2Q22.

The 2Q23 numbers bring the total number of mandates awarded in the first half of the year to 112 roles in situations involving an aggregate USD 66.9bn debt. By comparison, there were 174 mandates involving USD 172.9bn debt in 1H22 (see page 7 of the attached report for a detailed breakdown of mandates by quarter).


‘Legacy’ Chinese Property workouts provide significant restructuring work

As was the case in 2022, most of the mandates in 1H23 were PRC situations related to the real-estate sector. In 2Q23, Chinese real estate sector roles accounted for 35 of the total APAC (ex-Japan) mandates and involved debt of USD 34bn, or 67.9%, of the total debt for which roles were awarded in the region in the quarter. As a result, the number of mandates related to Chinese real-estate situations in 1H23 totaled 48 on USD 40.3bn of debt versus 85 roles in 1H22 on an aggregate debt of USD 121.3bn.

Almost all the 35 China property sector mandates in 2Q23 were those that arose out of situations in which the debtor had defaulted or where restructuring advisors had been appointed prior to the April-June quarter. Thus, out of the 35 mandates arising from situations involving 18 developers or property managers, only one — Guangzhou Fineland Real Estate’s appointment of China CITIC in June for a potential liability management exercise for its 340m due-27 July 2023 bonds – was a mandate involving a new stressed or distressed situation. (Click here to view these cases on Debtwire’s Restructuring Database).

Five of these ‘legacy’ (i.e., situations where mandates or defaults had occurred prior to 2Q23) situations involved Chinese property companies that were each seeking to restructure more than USD 2bn in debt. The cohort included four developers – China Aoyuan GroupKWG GroupJiayuan International Group and Powerlong Real Estate – as well as financial services and real estate conglomerate Oceanwide Holdings


New restructuring situations

Only five restructurings processes began during 2Q23 – the two largest of which were Indonesian state-controlled construction company Wijaya Karya (Persero) Tbk and Indian budget airline operator GoAirlines (India) Pvt Ltd, both of which are seeking to recast over USD 1bn of debt.



Country breakdown

Including the 35 property-related mandates, Chinese companies from all sectors accounted for a total of 45 mandates on USD 43.5bn debt, or 62.5% and 86.9% of the respective 2Q23 totals. As the chart below shows, Chinese companies have provided a huge chunk of the work handed out to APAC restructuring professionals since about mid-2021, when the property sector began to collapse.

After PRC-related situations, the second highest number of mandates awarded in 2Q23 arose from just one Australian-related insolvency: cancer care provider GenesisCare Pty Ltd’s Chapter 11 process, which began on 2 June and generated nine mandates.  The Sydney-headquartered company had pre-petition debt of 1.7bn.



Top advisors

Alvarez & Marsal – which was awarded five mandates in 2Q23 involving USD 4.1bn of debt – won the most roles of any financial advisory firm during the quarter. By amount of debt, PwC appears to have towered above other financial advisors with the Big Four firm advising on situations involving USD 18.2bn debt. However, USD 16.83bn of the USD 18.2bn amount came from PwC’s role as Aoyuan’s monitoring accountant.

Sidley Austin won the most mandates of any law firm with seven roles involving USD 7.8bn of debt.


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DebtDynamics EMEA | Kicking the can: refinancing and extensions dominate issuance and hit highest share in a decade

With the highest interest rates in the Eurozone since the Global Financial Crisis, the European leveraged finance market has been dominated by companies that need to refinance or extend their deals. High-yield bonds and first-lien institutional term loans with refinancing and amendment-and-extension as the primary use of proceeds reached 62.8% of the 2023 issuance up to 22 June, the highest level in over a decade.

Source: Debtwire


Lack of new money

The high interest rate environment and the uncertainty surrounding peaks, means there is little-to-no incentive for new money deals, giving way to a flurry of refinancings.

The figures show how hard it’s been for investment bankers to bring new money to the market, with the financing of leveraged buyouts and acquisitions funded by term loan Bs and corporate high-yield bonds dropping to their lowest level in a decade. And this is true for both the amount issued and the market share.

Issuances to finance LBO and acquisitions YTD made up just 15.5% of the total printed, a fraction of the 49% peak of 2022 and significantly lower than the 29% average of the past decade. In volume, the EUR 9.13bn issued thus far to finance buyouts and acquisitions is the lowest amount compared to other first semesters since 2014.

Source: Debtwire

While the total amount issued in 2023 (EUR 58.8bn) came in below the first-halves’ average of EUR 79.2bn, the effect was particularly noted among new-money transactions, with LBO and acquisition funding amounting to less than half of the historical average of EUR 20.2bn.


The LBO TLB boom aftermath

When split between loans and bonds, LBO issuance as a share of the total is relatively stable on the bond side when compared to the much more volatile TLB market. High-yield bonds to fund buyouts and acquisitions have ranged from 6.2% and 13.7% since 2017. The TLB LBO market has been like a roller coaster, with this year’s figure (8.5%) well below last year’s 39.2%.

Focusing on the nominal amounts issued, the decrease is again much more prominent in loans, the primary tool used in previous years, when the LBOs had their boom.

In 2021, EUR 61.7bn worth of term loan B facilities was printed to finance acquisitions. The figure dropped by nearly half in 2022 and has yet to reach EUR 9bn in 2023 so far.

Source: Debtwire
The chart shows that, beyond the decrease in total issuance, there’s a more substantial fall in debt to fund LBOs and an even more dramatic drop among TLB facilities in which the primary use of proceeds is to fund buyouts and acquisitions. This retreat has made room for the current situation in the levfin market, dominated by refinancing, amendments and extensions issued by companies with an urgent need to push deadlines.

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LevFin Highlights 2Q23: Playing catch up – rebound in high-yield activity buoys 1H23 LevFin volumes

Leveraged finance (LevFin) issuance across the US and European institutional loan and high-yield (HY) bond markets totalled USD 287bn in the first half of 2023, falling just 8% shy of the volume raised in 1H22. Nevertheless, the figure doubled from just USD 143bn raised during 2H22, bolstered by a strong rebound in HY activity on both sides of the Atlantic. Quarter-on-quarter (QoQ), LevFin issuance rose 11% to USD 151bn in 2Q23.

Markets cracked on as wobbles in the US regional banking system appeared to be contained and losses from the forced rescue of Credit Suisse by UBS were mainly limited to AT1 bonds, while the macroeconomic backdrop turned out to be more constructive despite pressures from persistently high inflation and the consequent central bank rate hiking cycle.

Long-running fears of hawkish rate hikes triggering a recession have yet to materialise, with consumer spending and labour markets showing more resilience than previously projected. Notwithstanding some softening, issuers generally posted better-than-expected first quarter earnings results. But while fundamentals looked healthier than anticipated, default rates inched up and are expected to rise rapidly as rising interest rates erode cashflows and render capital structures of weaker credits unsustainable.

Source: Dealogic; data correct as at 30 June 2023

High-yield bond markets rose from the ashes this year, with US issuance clocking in USD 80bn across 90 bond transactions in 1H23. The figure marks a 159% jump on the mere USD 31bn of bonds issued in the second half of 2022 and a 32% increase from USD 60bn raised in 1H22.

Following a temporary retreat amid woes in the regional banking system, the US HY market activity bounced back in April and boomed in May despite a period of ongoing uncertainty surrounding the lifting of the US debt ceiling. Although activity cooled off in June, 2Q23 issuance rose 33% from the previous quarter, churning in USD 46bn across 50 transactions.

In the US leveraged loan market, institutional issuance in 1H23 recovered from the lows of 2H22, but it was nevertheless down 26% when compared to USD 195bn raised in the first part of 2022. In total, USD 144bn was allocated across 214 institutional loans during the first half of 2023, split almost evenly between the two quarters. February was the busiest month in terms of loan issuance, while market activity also picked up paced in May and June.

Source: Dealogic; data correct as at 30 June 2023

In Europe, the HY bond market also staged a strong comeback in 1H23 with USD 26bn raised across 56 transactions, almost quadrupling from USD 6.7bn netted in the second half of last year, while representing a 23% YoY increase on USD 21bn in 1H22. April and May were the busiest months in terms of issuance, with 2Q23 volume climbing 36% to USD 15bn from USD 11bn transacted in the first quarter.

The European institutional loan market recorded a 15% YoY increase on the back of USD 38bn raised across 60 transactions in 1H23. With USD 18bn and 19bn allocated across 1Q and 2Q23, institutional loan issuance almost caught up with USD 21bn raised in 1Q22 and rose well above the quarterly volumes of USD 12bn and under in the latter part of 2022.


Shifting gears: new HY issue yields slide below loans

Although loan margins descended from the heady heights of last year and original issue discounts (OIDs) tightened, yields on new issue loans rose above those seen in the HY markets as base rates continued to soar. The three-month SOFR and Euribor rates ascended to 5.26% and 3.58% at the end of June, while the weighted average margin on new US and European loans stood at around 461 basis points (bps). Although running below the levels in December, the average margin in the US rose from 436bps in 1Q23, while it tightened in Europe from 475bps.

In the HY bond market, weighted average yields on new issues in the US and Europe fell to 8.4% in 1H23 from 9.8% at the end of 2022, supported by better technicals.

Source: Dealogic; data correct as at 30 June 2023


On the rally: loan prices and bond yields tighten

Secondary loan prices rallied in large part of the year on the back of strong CLO demand. In the US, the weighted average loan bids peaked at 94.87 in mid-June following the Federal Reserve’s decision at the start of the month not to raise interest rates but retreated to 92.74 at the end of the month. At the same time, the average loan bids in Europe climbed to 92.37, softening to 91.56 at the end of June.

Secondary US and European HY bond yields fell from weighted averages of 8.73% and 7.38%, respectively, at the start of January, to hit lows of 7.56% and 6.49% respectively at the start of February. However, average yields subsequently climbed back up in anticipation of further interest rate hikes and the subsequent news of bank rescues ending at 8.42% in the US and 7.24% in Europe at the end of June.

Source: Markit and BofA HY Index; data correct as at 30 June 2023


Primary drivers: A&Es and refis proliferate  

Refinancing and amend-and-extend (A&E) transactions dominated the LevFin space this year, particularly in Europe where the pipeline for mergers and acquisitions (M&A) and leveraged buyouts (LBOs) remained thin on the ground. Although bankers reported an uptick in M&A discussions this year, deals often failed to materialise. But while a higher deal death rate stemmed in part from a mismatch between seller and buyer valuations, private creditors have also been increasing their share of the M&A market. Underwriting large public-to-private deals that take a long time to come to market has become particularly challenging for banks, following considerable losses incurred last year. With banks asking for large flexes to compensate for market volatility risks, some sponsors have opted for higher, but certain pricing offered by private debt financiers.

M&A-related financing has also been shifting away from loans to HY bonds, more notably in the US, amid more attractive technicals, while hybrid structures involving bonds, loans and private debt were also seen on both sides of the Atlantic.

At the same time, private creditors have also been stepping in to refinance broadly syndicated loans, particularly of the more levered credits for which existing lenders would typically demand an equity injection before proceeding with a refinancing or an extension.

In the US, refinancing, repayments and recaps totalled USD 82bn, accounting for 54% of the HY bond and institutional loan issuance in 1H23. M&A/LBO financing totalled USD 124bn in 1H23, or about 35% of the total, while LevFin issuance for general corporate purposes (GCP) made up the remaining 11% of the volume.

In Europe, M&A/LBO financing amounted to USD 13bn or just 20% of the 1H23 loan and HY bond issuance. Refinancing, recap and repayment transactions netted USD 40bn, representing 62% of the total, while GCP accounted for 18%.

Source: Dealogic; data correct as at 30 June 2023


From sprint to crawl: CLO issuance slows down at quarter-end

CLO issuances steamed up in the first quarter as anchor investors resurfaced and liability costs started tightening, reaching USD 33bn in the US and EUR 6.7bn in Europe. After some softening in March and April, CLO printing picked up pace in May. However, as demand for paper outpaced the supply of new loan issues, managers continued to ramp up through the secondary markets, in turn driving loan prices up. In the absence of a similar price tightening in CLO debt tranches, rising loan prices started hurting the already thin arbitrage, leading to a slowdown in new issues in June.

In total, new CLO issues in 1H23 reached USD 52bn in the US and EUR 11.7bn in Europe, down 13% and 15% YoY, respectively. Refinancings and resets have been largely absent since 2022, with no reissues since 2021.

With direct lenders taking an increasing share of debt markets, issuance of CLOs backed by private credit also increased in the US, while there are expectations that mid-market deals could soon surface in Europe.

Source: Creditflux; data correct as at 30 June 2023


Popular sectors: US technology and European chemicals top the charts

The computers & electronics sector continued to top the LevFin charts in the US, hauling in USD 30bn this quarter, while oil & gas and chemicals followed with USD 21bn and USD 20bn, respectively. Insurance trailed with USD 19bn, and USD 16bn was raised in the leisure & recreation sector.

In Europe, the chemicals sector led with USD 10bn, while professional services followed with USD 9bn. Leisure & recreation generated USD 6bn, while the computers & electronics and retail sectors each punched in USD 5bn.

Source: Dealogic; data correct as at 30 June 2023


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Up and down: CEE sovereigns spark busy 1Q23 primary market, but quiet since then

International bond placements in Central and Eastern Europe (CEE) reached a record USD 30.5bn in 1Q23, surpassing the previous high of USD 29.3bn set in 2Q20 in the midst of the coronavirus (COVID‑19) pandemic. Sovereigns had been seizing the opportunity when US Treasuries declined at the start of the year, as the Federal Reserve slowed on interest-rate hikes. However, 2Q23 opened at a snail’s pace, as the European Central Bank raised three key interest rates by 50 basis points (bps) in mid-March against a backdrop of instability in the global financial sector caused by the collapse of Silicon Valley Bank, First Republic Bank and Signature Bank, as well as the controversial rescue of Credit Suisse by UBS. Turbulent events in the global banking sector hit volumes, with only two EUR- and USD-denominated bonds totalling shy of USD 200m priced between April and May vs 11 hard-currency bonds for around USD 7bn priced in April and May 2022.

CEE sovereign issuance ramped up in 1Q23

When to expect new deals

Between 2017 and 2019, Russia and Ukraine accounted for around 30% of Eurobonds placed in the region. Sanctions imposed on Russia and financial strain on Ukraine arising from the war manifest in zero issuances from these countries in 2022 and 2023 year-to-date (YTD). While we do not expect any primary activity from Russia on international markets for the foreseeable future, Ukraine is also unlikely to tap the market for new debt. The country’s distressed debt was restructured last year, and Ukraine is more likely to go through another round of restructuring as soon as the war is over.

Romania and Poland drove the slew of placements in 1Q23, with Poland printing around USD 8.8bn-worth of EUR- and USD-denominated bonds in the first three months, and Romania placing around USD 6.5bn of Eurobonds since the start of the year. Poland budgeted a PLN 68bn (around USD 16bn) deficit for 2023, therefore we do not expect the sovereign to tap the market before 3Q23. Romania’s government deficit was forecast to decrease year-on-year in 2023, but the disbursement of European funds totalling RON 9.35bn (around USD 2bn) was less than half of the budgeted amount, which heightened the strain on the economy. Given that 80% of budget expenses already go towards pensions, government salaries and debt servicing, we anticipated considerable strain on the pricing for new debt if the sovereign were to tap the market again before the end of the year.

Romania and Poland leading 1Q23 CEE Eurobond issuance

Is there any demand?

Sovereign Eurobonds issued in 1Q23 saw strong demand from investors because of scarce supply in the CEE corporate space. Average coupons on USD-denominated bonds placed in the first quarter were around 6.61%, with yield to maturity averaging 6.72%, while EUR-denominated bonds had an average coupon of 3.56%, with yields averaging 3.91%. Spreads widened to an average of 310 basis points (bps) on USD-denominated bonds, reaching 385bps for Romania’s USD 1.25bn 7.625% 30-year bond placed in January. Spreads averaged 207bps on EUR-denominated bonds, reaching 375.3bps for Romania’s EUR 1.4bn tap on its EUR 850m 6.625% 2029s priced at the end of January.

Demand for sovereign bonds is consistent, and the abundance of offerings in the first quarter of the year suggests that CEE countries are likely to come to the market next in the third quarter to finance the remainder of their budgets for the year.

Average coupon is at its peak, while yields to maturity are going down

All data as of 29 May, 2023

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On the retreat: investors steering clear of riskier assets in 2023

Debt issued in the institutional leveraged loan market is shifting back in the favor of BB facilities over B-rated tranches. So far in 2023, almost 40% of activity within these two groups has been BB rated, marking the highest percentage in the past five years for the safest assets in the sub-investment-grade space.

The bond market has followed a similar trend, with the share of debt issued as secured notes remaining at record highs of near 60% over the past three quarters. The historical average ranges between 25-45% in the past decade, highlighting the current move towards safer assets.

In both markets, leverage can be seen to be falling, with investors rushing towards safer assets, as lending on higher leverage ratios becomes unpalatable. Net leverage for 1H23 stands at 4.5x, while gross leverage is currently at 4.9x.

To compensate for their investments in these riskier assets, investors have been requiring higher yields on deals that have made it over the line so far this year. Yields on first-lien institutional loans jumped to an unprecedented 10.6% thus far in the second quarter, and the weighted average yield in the bond market stands at 8.7%. While this figure has decreased by over one percentage point from highs in 4Q22, the yield remains significantly above levels seen in recent years.Leveraged loan issuance pivots back toward safer instruments

New money, new lows

Despite the prevalence of higher yields, refinancing activity continues to be a cornerstone of the current market, with high-yield bond issuance skyrocketing to USD 34bn so far in 2023 – nearly double the same period last year. Refinancing is similarly buoying the leveraged loan market, rising 16% year-on-year despite overall leveraged issuance falling 30% to just under USD 300bn in the year to date (YTD). This shows that even with the headline figure of the leveraged market appearing solid, there is a marked lack of new capital being deployed in the sector.

New money issuance continues to slide
As a result of a lack of supply from M&A transactions, dividend recaps have started to resurface, as sponsors realise exit opportunities represent one of the few avenues available to them to achieve a return on their investment in the near term. A further USD 900m was issued for shareholder payments in April, bringing the total YTD amount to USD 3.6bn.
Considering the leveraged market in its current state, eventually something will have to give. Issuers are currently paying over the odds to refinance debt, pushing out maturities in the short term at exceptionally high interest rates, which are unsustainable over the long term. The market is in an eerie calm, with overall volumes appearing respectable. However, money being moved away from lower-rated assets, refinancing dominating issuance, and the lack of a solid M&A pipeline all point to an unsustainable market, with issuers set up to be unable to pay the higher interest rates demanded by investors for the risk taken.
If interest rates were to drop materially in the next few years to allow borrowers to refinance at manageable rates, then a material rise in defaults could be avoided. However, if the market remains in its current state, the ominous markers above suggest a difficult road ahead.
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Flourishing market: Sukuk driving Islamic financing in MENAT

The issuance of sukuk, Sharia-compliant financial certificates, ramped up in the first and second quarters of 2023 compared with a slower start in 2022. Issuers from Saudi Arabia, by far the largest market for Islamic finance, have led the deal spree, taking up 65% of all international sukuk placements so far this year. By contrast, the number of Islamic syndicated loans in the region has dwindled in 2023, with issuers seemingly rushing to take advantage of the deep liquidity on offer from sukuk investors. In 1Q23, there were only two USD-denominated Islamic loans signed, according to Dealogic, compared with seven in 1Q22. Just a handful of issuers, such as Bahrain’s Nogaholding, have delved into the Islamic borrowing space this year.

At the same time last year, nine issuers in the MENAT region had entered the sukuk market, according to Dealogic. So far this year, that number has grown to 14 names. This translates to around USD 20.6bn of sukuk in 2023 year to date (YTD) versus USD 8.7bn in 2022 YTD. One of the factors driving this activity, according to market participants, is the lower-than-expected number of transactions in MENAT last year, as issuers grappled with a choppy market backdrop driven by macroeconomic and rates volatility.

Now, as issuers and advisors alike see less volatility in the market, alongside an anticipation that the monetary tightening squeeze by major global central banks may come to an end, positive sentiment in the fixed-income market is more abundant, according to one Dubai-based banker. Pent-up demand for sukuk following suppressed supply in 2022, combined with a healthy pipeline of maturities, mean that investors are ready to deploy cash.

The market is developing innovatively, with more companies showing interest in issuing ESG-linked sukuk. Earlier this month, Abu Dhabi-based real-estate manager Aldar Investment Properties priced its debut green sukuk. In addition, market participants note that the sukuk private placement market is also growing in size, with names like Saudi Real Estate Refinance Company touted to be eyeing PP deals.

Sukuk issuance recovering from 2022; loans volumes look thin so far

Dominant force

Saudi Arabia has accounted for over 40% of international sukuk deals executed in the MENAT region since 2021. However, during the first five months of 2023, around two-thirds of all international sukuk cash raised in MENAT originated from the sovereign. In total, Saudi Arabia and its corporates issued USD 13.4bn of foreign-currency sukuk during the first five months of 2023 – a record since 2008. Almost half of this can be attributed to a jumbo sovereign dual-tranche placement of USD 6bn, which was priced on 15 May. Note, though, that this bond saw a negative one-day change of 1.62% after the closing price for the six-year notes and a 1.75% negative change for the 10-year notes, according to data from Dealogic.

Complex operating environment

While the deal pipeline for 2023 continues to fill, the need for additional financing depends to a large extent on oil prices. As the Organisation of the Petroleum Exporting Countries (OPEC) cuts oil production in an attempt to keep prices higher, Fitch forecasts 2023 Brent Crude at USD 83.5 per barrel (bbl). As at 2 June, Brent Crude was trading at USD 74.9/bbl. This should be enough to support the economy of Saudi Arabia, the largest sukuk issuer, which needs an oil price around USD 80.9/bbl to balance its 2023 budget, according to the International Monetary Fund (IMF). The current price should also support the economies of the United Arab EmiratesOman and Qatar, as the IMF estimates break-even oil prices for these countries at USD 55.6/bbl, USD 72.2/bbl and USD 44.8/bbl, respectively.

Further issuance from such sovereigns may be opportunistic, market participants say, given that issuance needs for many sovereigns – especially in the Gulf – are limited because of strong fiscal positions.

Bahrain, meanwhile, might need significant additional financing, as its break-even oil price is estimated at USD 126.2/bbl, significantly above the forecast provided by Fitch, while oil continues to take up a major chunk of GDP revenue (85% as of end-2021). Bahrain had a positive year in 2022, when high oil prices (USD 125/bbl at their peak in May last year) supported the contraction of the budget deficit to 1.7% of GDP from 6.8% in 2021. The sovereign returned to the market in April this year, pricing a USD 1bn 6.25% 2030 sukuk and a conventional USD 1bn 7.75% 2035 bond at par. With Brent Crude set to remain below Bahrain’s break-even price, the economy is likely to need additional external funding.

Have yields stabilised?

While the average yield-to-maturity and average profit rate remain at historically high levels, they have dipped slightly to an average profit rate of 5.8% for MENAT issues priced this year from highs of 6.5% in 4Q22. At the same time, the average spread-to-benchmark has also returned to typical levels of around 212 basis points (bps) from a wider peak of 531bps in 2Q22. We see profit rates gradually declining further towards the end of 2023, as oil prices stabilise. According to one Dubai-based banker, spreads on GCC sukuk in particular have been relatively steady, moving within a range of 150-175bps. The drop in US Treasury yields since the start of the year has been the main trigger behind lower overall yields, and this is also encouraging issuers to launch new sukuk and lock in yields at lower levels than last year.

Spread-to-benchmark stabilises, while profit rates and yields on downward trend

What’s brewing?

As interest in the highly liquid sukuk market increases, the pipeline of new certificates is growing. A number of issuers in the Middle East, including AlmaraiEnergy Development Oman (EDO) and Abu Dhabi Islamic Bank (ADIB), are all considering their own public sales, according to Debtwire reports last month. Saudi Arabian Almarai has a USD 500m sukuk due in March 2024 that it could refinance ahead of maturity, while EDO may want to add a sukuk to its funding mix after recently renegotiating the terms of an existing USD 2.5bn loan, shedding USD 100m of interest. ADIB has an upcoming call date in September for its outstanding USD 750m AT1 sukuk that it priced back in 2018.

According to one GCC-based market source, there is a steady pipeline of deals expected to emerge before the last week of June, after which participants expect a more subdued atmosphere in light of the summer break.

As international sukuk gain momentum, interest in this segment has spilled over to other countries across the globe. In March, Air Lease Corporation, a US aircraft leasing company, priced its first USD 600m five-year international sukuk, with market participants commenting that the successful deal could entice other debut issuers from geographies that do not have established Islamic finance markets.

In April, Debtwire also reported that the Republic of the Philippines may be considering an inaugural international sukuk sale.

On 25 May, Malaysia’s sovereign wealth fund, Khazanah Nasional Berhad, returned to the sukuk market after two years, pricing a USD 750m five-year sukuk alongside a USD 750m 10-year conventional bond. The deal was more than seven times oversubscribed and attracted interest from over 200 investors, including some in the Middle East.

Overall, there is growing interest in the Islamic financing market, particularly sukuk, as a key source of financing, as demonstrated by the growing volume of transactions in the MENAT region. The product is gaining momentum and becoming more widespread, while at the same time finding support in new markets in Asia-Pacific and the Americas.

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Data Insight

Count down: high interest rates squeeze companies with EUR 428bn to refinance by 2025

The European leveraged market has a hefty EUR 428bn to be refinanced in the next two-and-a-half years, according to Debtwire data.

This vast amount is putting pressure on borrowers, who are likely to have to refinance debts at rates considerably higher than they originally were. The Eurozone rate for refinancing operations is currently 3.75%, its highest point since 2008, and professional forecasters surveyed by the European Central Bank predict it remaining above 3% until 2025. The case is similar to the Euribor rate, currently at 3.2%, used in floating-rate operations and as a benchmark for fixed-rate offerings.

This scenario is significantly changed from when these high-yield (HY) bonds and institutional term loans were launched. Between 2015 and 2022, the Euribor rate was always below 0%.

Debtwire data also shows the maturity wall peaking in 2026 and 2028, mainly thanks to the expiration of term-loan facilities. TLB volumes coming to maturity in these two years stand at EUR 125.9bn and EUR 178.3bn, respectively.

Considering TLB facilities commonly have a seven-year maturity, a significant part of these deals was printed right before and in the aftermath of the coronavirus (COVID‑19) pandemic, when key ECB interest rates were at 0%.

Outstanding leveraged debt peaks in three years' time


debt returns

Analysis of the use of proceeds of deals helps to understand what lies ahead. Debt raised to refinance existing facilities is by far the main use of bonds and loans with maturities up to 2028, accounting for between one-third and half of total outstanding debt each year.

This is followed by leverage buyouts (LBOs), which are prevalent in those deals with maturities further down the line, starting with only 14.5% in 2023, but reaching 31.1% on deals with maturity in 2028. The peak comes seven years after the post-pandemic boom in LBOs, when EUR 82bn was raised following the release of pent-up demand for private-equity acquisitions in 2021.

Data show that issuers of LBO debt are less exposed to near-term maturities. Some EUR 32bn of LBO deals are due to expire over the next six quarters. However, this is less than each of the next four years. In 2028, the LBO volume to mature reaches an eye-watering EUR 81.3bn.

LBO deal maturities are set to swell in 2028Top five countries' prominence increases

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