Monthly European Loan Market Update - August 2019

Monthly insights and updates from the Invesco Fixed Income team

Aug 12, 2019 | Invesco Fixed Income

The Credit Suisse Western European Leveraged Loan Index (“CS WELLI” or “Index”) returned 0.44% in July, comprised of principal return of 0.04% and interest return of 0.40%.1 Year-to-date (“YTD”) returns are 3.56%.1

Expectations for supportive central bank announcements buoyed the loan market throughout the month. July’s total returns were evenly balanced between Euro-denominated loans (23 basis points  (“bps”) return / 67% of the Index) and US-denominated loans (21bps return / 27% of the Index).1 

US  Federal Reserve (Fed) and ECB meetings occurred at the end of the month that were generally less dovish than hoped. While the Fed cut rates by 25bps, equities fell, the yield curve flattened, and the US Dollar strengthened – largely on the back of comments that the cut was not “the beginning of a lengthy cutting cycle.” While the ECB made no changes to policy (apart from inflation target wording), mounting downside risks to the Euro area’s (“EA”) growth outlook (growth halved to 0.2% quarter-over-quarter in 2Q) in conjunction with persistently weak inflation reinforced the consensus viewpoint that the ECB will re-ignite QE in September. Global trade tensions as well as a new UK Prime Minister who is adamant that the 31 October Brexit deadline is fixed added to mounting macroeconomic uncertainty. 

While macroeconomic conditions become more circumspect, the balance between supply and demand in the loan market remains healthy. July’s issuance was €7.7 billion. While YTD volumes are €43 billion – down roughly a quarter year-over-year – volumes have caught up significantly from the one-third reduction witnessed at the end of the first quarter. July volumes included some large repricings (e.g. Techem) as well as dividend add-ons and maturity extensions. M&A activity continues to be muted, accounting for 50% of this month’s volume (versus 85% for July 2018) and 57% YTD ( versus 75% for the same period last year). Loan investors remain disciplined, particularly for cyclical credits (e.g. Ineos), and continue to require lender-friendly changes to documentation.

European CLO issuance remains strong. July was the busiest month on record in the post-crisis era, with €5.4 billion of deals from 13 transactions issued. This record supply was posted amid easing arbitrage pressure, with CLO AAA liabilities generally tighter (approximately 107bps area, -4bps month-over-month) despite the increase in supply. CLO YTD volume now totals €20.1 billion, almost 13% ahead of last year. 

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^1 Credit Suisse Western European Leveraged Loan Index (CS WELLI) in EUR as of July 31, 2019.

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