Debt Market Monitor Q4 2019
European economic outlook
Global growth is expected to remain modestly positive over the next two years. Though there is a rising recession threat for 2021, tail risks are expected to recede with trade wars de-escalating, in part restoring lenders’ confidence.
With strong growth in the private debt market over the past few years, there is now a surplus of dry powder waiting to be deployed. Consequently, credit markets remain exceptionally strong for both new and repeat issuers - with record leverage and pricing being achieved in favoured sectors, evidencing a flight to quality by lenders.
We anticipate a wave of opportunistic refinancing and repricings in the coming weeks against a backdrop of strong buy-side demand, and an extensive pipeline of new CLO issuance expected to price (c.50 vehicles).
Leveraged finance origination forecasts (€bn)
LBO transactions per region
Percentage of deals accounted for by LBO transactions per region
- M&A volumes in the final quarter have been tempered by political uncertainty and continued Brexit considerations
- There is an expectation that Q4 transaction ‘overhang’ will underpin increased M&A activity in H1 2020
- There is also continued evidence of market bifurcation; witness final terms secured by Roehm though syndication
UK Q4 deals by structure
Unitranche deals are continuing to dominate the market, now representing 77% of tracked deals compared to 47% in Q4 2018. Club deals remain the second most common structure at 20% of tracked deals (flat on Q3 2019).
- There has been a high level of M&A activity in the mid-market supported by more borrower friendly terms and documentation
- Increased competition between private debt funds has driven higher leverage ratios and lower margins for comparable credit quality
- After a strong Q3 2019, French leveraged loan volumes remained strong in Q4 2019 with 27 deals completed vs. 35 in Q3 2019
- Competition for resilient, proven credit stories remains very high. However, lenders are becoming increasingly selective in how they deploy resources, remaining disciplined for weaker credit stories given the uncertain economic backdrop going forward and position in the cycle
French deals split per quarter
After a dynamic Q3 2019, French leveraged loan volumes have remained strong in Q4 2019 with 32 deals completed vs. 35 in Q3 2019 due to robust levels of M&A activity
- Markets in the DACH region have been slower in Q4, with lower sponsor investment activity reflecting the general trend of 2019, driven by valuation discrepancies
- However, the tech, healthcare and infrastructure sectors are still viewed favourably in the DACH market and continue to secure attractive terms
- Q4 showed higher activity among lenders versus the activity seen in Q1 to Q3, as those who had not been active in the first three quarters increased deployment
- Looking to 2020, the year has started with a very active bond market, whilst the M&A pipeline appears strong even though global market uncertainty appears to be having a limited impact on the mid-cap markets
DACH issue volume per deal type
Leveraged loan activity slowed in Q4 with 22 deals following a spike in activity in Q3 2019, with a notable increase in the use of 1st Out / 2nd Out structures.
- Despite political uncertainty in forming a stable government in Spain, there has been a higher transaction volume in Q4 2019 versus the previous year with 10 LBOs completed versus three LBOs in Q4 2018
- The top three domestic banks remain the main financing providers in fundings up to ~€100m, while international banks take the lead in larger deals with international sponsors as front running bidders
- Institutional funds continue to be very active in the Spanish market both in sponsor-driven and sponsor-less situations, with an ability to structure complexities at speed as they are more open to complex structures.
- In contrast, lenders have become increasingly inflexible as they look to manage the downside risk, especially in cyclical sectors (e.g. automotive, construction engineering, etc.)
- We expect reduced volumes in certain cyclical industrial sectors, especially as valuation mismatch between buyer and seller becomes more pronounced. In contrast, where resilience is proven, we expect a larger volume of refinancings and repricings
Spanish deals per quarter
Q4-19 continued the Spanish trend, with 2019 with upward leveraged loan activity, predominantly driven by an uptick in refinances versus 2018.
- The Italian lending landscape remains hampered not only by macro-economic and geopolitical uncertainty, but also the longer term structural challenges of high public debt levels, sub-par balance sheet solidity of the banking sector and weak economic growth
- The new coalition government, is reducing political uncertainty, especially on the international stage. This has contributed to a reduction of credit spreads, and consequently, the cost of debt - easing access to credit for borrowers and pushing banks to pursue leveraged finance more aggressively in order to seek satisfactory returns
- Non-bank liquidity (both private debt and higher yield bond market) growth continues, driven by the fragility of the mid-market bank landscape, favourable regulatory evolution for non-bank lenders and borrowers hunt for enhanced flexibility