Debtwire today released the November European Leveraged Insights report highlighting significant trends in the leveraged loan and high yield bond markets.
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Key insights include:
Refinancings dominate issuance volumes though new money deals also smash 2016 levels
The refinancing trend became ever more pronounced in the fourth quarter, accounting for a lofty 76% of leveraged loan issuance in October and November combined.
Total leveraged loan issuance volumes in the fourth quarter to-date stand at EUR 40bn, taking year-to-date activity to EUR 238bn, 87% higher than total issuance in 2016.
High yield bond issuance replicates this trend, with refinancings accounting for 61% of issuance in the year to date. Overall high yield bond volume is at EUR 104bn so far in 2017, up from EUR 81bn over the same period last year.
Borrower-friendly conditions persist
Notably, while credit quality has remained attractive in terms of a low default rate, the quality of the ratings mix in both the loan and bond markets has declined, with more issuance in the B rated category this year compared to 2016.
Indicative of the current market environment, EBITDA adjustments have also become more optimistic. Based on the universe of deals analysed by Debtwire, EBITDA adjustments for deals which tap the institutional loan market have averaged 15% this year, with M&A-related deals hitting a 20% adjustment average. At the upper end of the adjustment scale, 26% of all deals and 40% of M&A deals included adjustments greater than 20% of EBITDA.
Pricing remains under pressure
After picking up in the second and third quarter, institutional loan spreads have reverted to their downward trend by ticking lower in the fourth quarter. In addition, downward flex activity far outpaced upward flexes over the period by a ratio of 13.5:1, illustrating the pricing pressure faced by investors.
High yield bond pricing mimicked the same trend, with yields ratcheting tighter this quarter, with the average YTM at 4.5%.
Secondary market still at lofty levels
In the secondary market, loans remain highly valued with 76% of institutional term loans and 68% of all term loans currently bid above par. The weighted average institutional loan bid finished the month at 99.59, while the broader term loan market ended at 97.26.
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Colm Doherty is Debtwire’s Global Head of Primary Market Analysis. He is responsible for leading the production of primary market analysis and reports focused on the leveraged loan and high yield bond markets. Prior to joining Debtwire, Colm was Director of Analysis at Thomson Reuters LPC covering leveraged loans, CLOs and high yield bonds.