Monthly European Loan Market Update - November 2019

Monthly insights and updates from the Invesco Fixed Income team

Nov 13, 2019 | Invesco Fixed Income

The Credit Suisse Western European Leveraged Loan Index (“CS WELLI” or “Index”) returned -0.35% in October, comprised of principal return of -0.71% and interest return of 0.36%.1 Year-to-date (“YTD”) returns are 3.82%.1

In general, markets benefited from a risk-on mode during October. The US and China crawled towards a trade deal, the US Federal Reserve cut rates by 25 basis points (“bps”), and Brexit developed, which all combined to improve sentiment. In contrast, the European loan market experienced pressure led by a weaker US loan market (lower rates, Energy sector selloff, retail outflows) and a more circumspect outlook in relation to macroeconomic/credit fundamentals. The European high yield market returned 2bps for the month, supported by ECB policy (forward guidance, QE).2 

European loan issuance for October was €12.9 billion – the busiest month this year – across 25 transactions. Volume was elevated by several large buyout deals, such as financing for theme park operator Merlin Entertainment (€1.4 billion of loans at EURIBOR+300, Ba3/B+) and market research firm Kantar (€750 million at EURIBOR+500, B1/B).

As the credit cycle ages, well liked, higher quality credits are able to (re)price at low margins. For example, Merlin Entertainment had the tightest spread for a new European leveraged buy-out (LBO) facility since the end of 2017. Moreover, during the month, nine deals flexed pricing tighter from initial guidance (59 YTD) and three widened (20 YTD), including Kantar. Refinancing activity was €6.3 billion, or 49% of issuance during the month, which was also the highest seen this year.3 Positively, a steady stream of investor-friendly changes in documentation occurred for lower quality credits. In general, the market is showing hints of bifurcation between higher/lower quality credits. As economic indicators stagnate (PMIs for example), the focus on cyclical credits is magnifying in both new primary issuance and secondary opportunities. In October, total returns for BB rated credits outperformed B rated credits by 54bps, whereas “cyclical” BB rated credits outperformed B rated credits by 66bps.1

Year-to-date primary volume is €64.7 billion (90% of equivalent period 2018 levels). At month-end, S&P Leveraged Commentary & Data’s (LCD) forward loan calendar stands at €2.9 billion, a relatively light forecast, reflecting a lack of large imminent buy-out transactions. Refinancing/repricing activity is likely to drive transactions for the remainder of the year. Demand from CLOs should provide some support, with LCD’s forward volume at €3.5 billion across 10 vehicles. AAA liability spreads remain in the low 90s. CLO new issues levels stand at €26.1 billion YTD, 9% ahead of last year.

The CS WELLI’s nominal value (size of the market) at the end of the month was €308 billion, a 9% increase YTD.1

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^1 Credit Suisse Western European Leveraged Loan Index (CS WELLI) in EUR as of Oct. 31, 2019.
^2 Credit Suisse Western European High Yield Index as of Oct. 31, 2019.
^3 Excludes August, as the summer vacation period distorts the analysis.

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